The Federal Reserve warned about financial stability risks stemming from frothy stocks and debt-laden hedge fund bets in its twice-annual report on potential vulnerabilities in the system, reports the New York Times
(7 May, Smialek), pointing to the rise of so-called meme stocks as one sign that risk-taking could be getting out of hand. The central bank issued its Financial Stability Report on Thursday after an unusual six months for markets. During that period, stocks climbed steadily as the US economic outlook rebounded amid the COVID-19 pandemic. At the same time, internet discussion boards fueled interest in stocks like GameStop, a cryptocurrency created as a joke has run up in value, and a little-known hedge fund melted down. Those events caused some people to wonder whether the financial system was in trouble. But the Fed's report painted a generally positive picture in which banks, consumers, and businesses have weathered the coronavirus shock in decent financial shape. Lael Brainard, a Fed governor, did say that "the appetite for risk has increased broadly," and the report itself warned that some asset prices could plummet if the appetite for risk falls. Meanwhile, the report suggested available data on hedge funds "may not capture important risks." The warning comes after an episode in March when problems at a large fund, Archegos Capital Management, spilled back to hurt banks.
From "Meme Stocks and Archegos: Fed Calls Out Financial Weak Spots"
Abstract News © 2021 SmithBucklin