Despite looming interest rate hikes, financial stability remains solid, Fed Board chair asserts

Federal Reserve policymakers may be on the verge of raising interest rates to deal with rising inflation – by March, that is – but financial stability continues to be solid, the chairman of the agency board said Wednesday.

During a press conference following the two-day meeting of the Fed’s rate-setting Federal Open Market Committee (FOMC, which made no changes to short-term rates at its meeting, but indicated increases are on the horizon), Federal Reserve Board Chair Jerome H. (“Jay”) Powell said there are a “number of positive aspects of financial stability” within the economy now.

He acceded that asset prices, which are one of the elements of the Fed’s financial stability framework, are high and reflect a high-risk appetite within the marketplace.

However, he said, asset prices themselves do not represent a significant threat to financial stability.

“And that’s because households are in good shape financially; better than they have been,” he noted. “Businesses are in good shape financially; defaults on business loans are low. The banks are highly capitalized with high liquidity and quite resilient and strong.”

The Fed chair did acknowledge some concerns in the non-bank financial sector around money market funds. However, he said, the Securities and Exchange Commission (SEC) “has made some very positive proposals there.

“We also saw some things in the Treasury market during the acute phase of the crisis which we are looking at ways to address,” Powell added.

On balance, Powell indicated, financial stability is not threatened. “Overall, the financial stability vulnerabilities are manageable, I would say,” Powell said, in closing an hour-long press conference.