Covid-19 Still Among Major Risks to Financial Stability, Fed Says

By Paul Kiernan

WASHINGTON -- The Covid-19 pandemic remains one of the biggest near-term risks to the stability of the financial system, the Federal Reserve said, while noting that asset prices are vulnerable to significant declines if investor sentiment shifts.

Advancing vaccination against Covid-19, massive government spending and low interest rates have helped asset valuations continue their rise in recent months from levels that were already elevated, the Fed said in a report Thursday.

"Should risk appetite decline from elevated levels, a broad range of asset prices could be vulnerable to large and sudden declines, which can lead to broader stress to the financial system," the central bank said in its semiannual Financial Stability Report. Such scenarios could materialize if progress on containing the virus falls short of expectations or the recovery stalls, straining some households and firms, the Fed said.

The report echoed recent comments from central bankers, including Chairman Jerome Powell, who last week described parts of the financial market as "a bit frothy." Still, other pillars of the financial system have either remained sturdy or improved over the past six months, as trillions of dollars of government stimulus spending and a recovering labor market have strengthened the finances of households and businesses.

"The overall financial-stability picture is mixed," Mr. Powell said last week. "But on balance, you know, it's manageable, I would say, and...it's appropriate and important for financial conditions to remain accommodative, to support economic activity."

The Fed's efforts to encourage a recovery from the pandemic-induced downturn have helped lift asset prices. The central bank has kept its key interest rate near zero since March 2020, making it cheaper for businesses and households to borrow and spend on things like machinery, cars and homes. It also buys $120 billion worth of Treasury and mortgage-backed securities each month, which holds down long-term interest rates and encourages investors to shift money into riskier assets such as stocks and corporate debt.

Write to Paul Kiernan at [e-mail]

(END) Dow Jones Newswires

05-06-21 1615ET