How possible changes in the role of U.S. financial assets as a “safe haven” might affect financial stability both domestically and internationally is “crucial to examine,” a Federal Reserve governor said Thursday.
Fed Gov. Adriana D. Kugler, in opening remarks to the 2025 Federal Reserve Board Macro-Finance Workshop in Washington, D.C., said she lately has been monitoring the “financial stability implications of the potential lower desirability of U.S. financial assets in flight-to-safety events.”
Lower desirability of U.S. financial assets, such as U.S. Treasury securities, has developed recently in the wake of significant tariffs imposed by President Donald Trump (R).
Kugler indicated there were several signs of lower desirability for U.S. financial assets. She cited a rising “VIX” (the Chicago Board Options Exchange, or CBOE, Volatility Index, which measures the stock market’s expectation of volatility based on S&P 500 index options), declining stock prices, rising long-term yields from U.S. Treasuries and depreciating U.S. dollar against the currencies of advanced foreign economies (AFEs), “with a notable role for the euro.”
“Importantly, the historical relationships and the observed moves in the VIX and interest rates of AFEs would have been associated with a decrease in long-term yields from U.S. Treasury securities and an appreciation of the dollar,” she said.
Kugler also noted her concern of whether stresses in U.S. commercial real estate (CRE) “could potentially spill over to the rest of the U.S. economy.”
“The CRE sector continues to face challenges from low vacancy rates and valuation losses, especially in urban centers for the office sector,” Kugler asserted. “Another challenge is that some banks, insurers, and securitization vehicles continued to have concentrated exposures to CRE. As we have seen in past crises, such as the Global Financial Crisis, vulnerabilities in specific sectors can have far-reaching consequences for the financial system. Understanding potential vulnerabilities and potential domino effects are vital for maintaining overall economic stability and crafting preemptive policies.”
The Fed governor also said she has been watching the “possible interaction” between the financial vulnerabilities of firms and their exposure to trade.
“As global economic tensions rise and supply chains evolve, understanding how a company’s financial health intersects with its international trade exposure becomes increasingly crucial,” she said. “This research could provide valuable insights for both policymakers and business leaders navigating an uncertain global economic landscape.”
Opening Remarks, Gov. Adriana D. Kugler
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