Persistent inflation risk and potential for real estate losses a worry in Fed report on banks

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A Federal Reserve survey of financial stability risks released Friday showed growing concerns of persistent inflation and the potential for real estate losses.

Inflation and real estate were the two most frequently cited topics among participants in the survey, conducted bi-annually by the central bank. The Fed interviews researchers, academics and market contacts about their concerns.

Roughly 75% of all survey participants mentioned persistent inflation and real estate valuations, up from about 50% in the prior survey in March, the Fed said.

Participants also cited risks associated with the reemergence of banking-sector stress.

In the most recent survey, respondents were attentive to risks posed by economic weakness in China. The survey had ended before the attack on Israel by Hammas.

Fed report findings

While the banking sector remained “sound and resilient overall,” some banks were facing “sizable” losses as the increase in interest rates had led to declines in longer-maturity, fixed-rate assets, the Fed said, in its review of conditions.

“A subset of banks continued to face funding pressures, reflecting concerns over uninsured deposits and other factors,” the Fed said.

Household debt remained at modest levels relative to GDP, with most of the debt owned by households “with strong credit histories or considerable home equity,” according to the report.

The Fed reported noted that prices for homes and commercial properties remained high relative to fundamentals.

Structural vulnerabilities persisted at money market funds, some other funds and stablecoins, the report said.

At the same time, life insurers continued to rely on a “higher-than-average share of runnable liabilities,” the report said.

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