Risks amid soaring markets raise Fed concern

WASHINGTON — A soaring stock market and fanfare around “meme-stocks” are drawing the attention of the Federal Reserve, as the economic recovery casts some shadows on a party that could eventually wind to an end.

Rising asset prices, plus riskier investor appetites, were noted in the Fed’s latest Financial Stability Report, with fears that a significant drop-off in asset prices could ripple through the broader financial system.

“With investors ebullient on expectations for a strong rebound, it is important to closely monitor risks to the system and ensure the financial system is resilient,” Fed Gov. Lael Brainard said in a statement accompanying Thursday’s report.

The semiannual report comes as the economy shows many signs of a rebound. The economy grew 1.6% in the first three months of the year, bolstered by rising coronavirus vaccinations and substantial federal stimulus spending. Weekly jobless claims hit a pandemic-era low for the fourth consecutive week.

But the sunnier outlook comes with its wrinkles. Some of the 8.4 million jobs lost during the pandemic are just starting to come back. Many Americans who don’t hold investments haven’t benefited from the stock market’s steady climb. And some analysts fear that soaring asset prices and home values reflect risky investments that can’t be sustained for long.

“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 report said.

The report said banks have stayed well-capitalized through the covid crisis. Yet events from the past few months highlight a need for greater transparency within the financial system, including for hedge funds and other financial entities with the power to roil Wall Street.

In March, for example, the private investment firm Archegos Capital Management collapsed, sending

waves through large banks, including Credit Suisse.

“The Archegos event illustrates the limited visibility into hedge fund exposures and serves as a reminder that available measures of hedge fund leverage may not be capturing important risks,” Brainard wrote.

Also this year, GameStop was transformed from a struggling mall retailer to a stock market marvel that rallied an online horde to take on Wall Street. Novice traders on the Reddit forum WallStreetBets raked in billions of dollars as shortselling hedge funds lost out on their bets that the stock would crater.

But that joyride and GameStop’s volatile stock price prompted Treasury

Secretary Janet Yellen to meet with top financial regulators, including those from the Securities and Exchange Commission, the Federal Reserve, the Federal Reserve Bank of New York and the Commodity Futures Trading Commission.

Many economists are also eyeing the housing market, saying that high demand is colliding with short supply in a way that is dangerously inflating prices. Home prices grew 7.7% last year, according to the Fed’s report — high by historical standards.

The surging demand has driven up prices for lumber and other commodities, bleeding into concerns among economists and in Washington about near-term inflation.