The trajectory of the global economy is also a concern, as lockdowns and downturns in other countries could spill over into the U.S. financial system. Regulators pointed specifically to the prospect of a “hard landing” in China as a potential worry and noted that the Chinese real estate sector is “heavily leveraged.” A slowdown in the real estate market there could hurt global commodity markets because China is such a major consumer of steel, copper and iron ore.
Inflation F.A.Q.
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What is inflation? Inflation is a loss of purchasing power over time, meaning your dollar will not go as far tomorrow as it did today. It is typically expressed as the annual change in prices for everyday goods and services such as food, furniture, apparel, transportation costs and toys.
Is inflation bad? It depends on the circumstances. Fast price increases spell trouble, but moderate price gains could also lead to higher wages and job growth.
How does inflation affect the poor? Inflation can be especially hard to shoulder for poor households because they spend a bigger chunk of their budgets on necessities — food, housing and especially gas.
Can inflation affect the stock market? Rapid inflation typically spells trouble for stocks. Financial assets in general have historically fared badly during inflation booms, while tangible assets like houses have held their value better.
The report also highlighted the fact that the pandemic has ushered in changes to the economy that remain hard to grasp.
The F.S.O.C. is closely watching the commercial real estate sector, for instance, out of concern that the rise of teleworking could permanently shift demand away from office space in cities. If this shift leads to a rapid drop in valuations at some point, it could deal a blow to small and midsize banks that hold property loans and destabilize the financial system.
Corporate credit also remains a concern, with leverage at non-financial corporations elevated compared with historical levels. Regulators are watching the airline, hospitality and restaurant industries, which have been hit hard by the pandemic, and warned that a wave of defaults or downgrades could be difficult for the financial sector to absorb.
The financial system is also facing an array of new threats.
Digital assets, known as stablecoins, are another potential source of vulnerability, regulators said, adding that more coordinated oversight is needed because the sector is evolving so quickly. They said that the value of digital assets remained highly volatile and that they could be subject to “the risk of operational failures, fraud, and market manipulation.”
The new technology could pose risks to the broader financial system if investors in digital currencies are suddenly unable to cash them in. The regulators also said that stablecoins could pose risks related to cybersecurity and illicit finance.
The F.S.O.C. does not have rule-writing power but it can prod regulators into addressing market vulnerabilities, and it has the power to designate certain entities or activities as “systemic” and in need of stricter oversight.
Article source: https://www.nytimes.com/2021/12/17/us/politics/climate-change-us-financial-threat.html
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