Fed ‘Monetary Policy Report’ sees ‘resilient’ financial system; vulnerabilities ‘low’

The U.S. financial system remains “substantially more resilient” than 20 years ago, the decade before the financial crisis of 2008, according to a Federal Reserve report sent to the Senate and House Friday.

In a relatively brief section on “financial stability” in its 71-page Monetary Policy Report, the Federal Reserve noted that asset valuations continue to be higher, despite declines experienced since the end of 2017 “in the forward price-to-earnings ratio of equities and the prices of corporate bonds.”

The report was released in advance of Board Chairman Jerome H. “Jay” Powell’s testimony Tuesday before the Senate Banking Committee (the “Semiannual Monetary Policy Report to the Congress”).

The report also notes that borrowing among “highly levered and lower-rated businesses” in the private nonfinancial sector remains elevated. However, the report states that the ratio of household debt to disposable income “continues to be moderate.”

Vulnerabilities from leverage in the financial sector remain low, the report states, which reflects “in part strong capital positions at banks, whereas some measures of hedge fund leverage have increased.”

Further, the report asserts, vulnerabilities associated with maturity and liquidity transformation among banks, insurance companies, money market mutual funds, and asset managers “remain below levels that generally prevailed before 2008.”

Federal Reserve Monetary Policy Report (July 13)