Federal Reserve Financial Stability Report: Liquidity in major financial markets is deteriorating

In its semi-annual financial stability report released on Monday local time, the Fed warned that liquidity conditions in key financial markets were deteriorating because of rising risks from the Conflict between Russia and Ukraine, tighter monetary policy and high inflation.
“According to some indicators, liquidity in recently issued Treasury and stock index futures markets has declined since the end of 2021,” the Fed said in its report.
It added: “While the recent liquidity deterioration is not as extreme as some past events, the risk of a sudden and significant deterioration appears higher than normal. Moreover, since the outbreak of the conflict between Russia and Ukraine, liquidity in oil futures markets has at times been tight, while some other affected commodity markets have become significantly dysfunctional.”
After the report’s release, Fed Governor Brainard said the war has caused ‘significant price volatility and margin calls in commodity markets,’ and she highlighted potential channels through which large financial institutions could be exposed.
Brainard said: “from the perspective of financial stability, because most market participants by large Banks or brokers into commodity futures market, and these traders are related and settlement organization members, so when a customer facing unusually high margin calls, the clearing agency members are at risk.” The Fed is working with domestic and international regulators to better understand the exposure of commodity market participants.
The S&P 500 fell to its lowest level in more than a year on Monday and is now nearly 17% below its record high set on Jan. 3.
“High inflation and higher interest rates in the US could negatively impact domestic economic activity, asset prices, credit quality and broader financial conditions,” the report said. The Fed also pointed to US house prices, which it said were “likely to be particularly sensitive to shocks” given their sharp rise.
U.S. Treasury Secretary Janet Yellen said the conflict between Russia and Ukraine and the outbreak continue to pose risks to the global economy. While Ms. Yellen also expressed concerns about some asset valuations, she did not see an immediate threat to financial market stability. “The U.S. financial system continues to function in an orderly manner, although valuations of some assets remain high relative to history.”

Post time: May-12-2022