US Debt Looms Large as Top Financial Stability Threat Outpacing Inflation Worries
1min read Recent findings from a Federal Reserve survey highlight growing concerns around U.S. government debt as the primary risk to financial stability, surpassing the worries over inflation that have dominated previous discussions. Conducted between late August and October, the survey encompassed inputs from financial professionals including brokers, funds, and academic experts. A notable 54% of respondents identified federal debt sustainability as the top threat in the next 12 to 18 months, up from 40% in a similar survey conducted in April.
The report, released on November 22, marks a shift in focus from policy uncertainty and inflation risks, both of which have seen diminished anxiety among financial professionals. The share of respondents worried about policy instability has reduced from 60% to 46%, while those concerned about high inflation and monetary tightening have plummeted to 33% from 72% in the previous survey. However, geopolitical issues in the Middle East have sparked resource disputes; concerns about these tensions have risen from 32% to 46% among participants.
The potential ramifications of increased U.S. Treasury issuance were noted, suggesting it might crowd out private investment and limit responses during an economic downturn. Participants emphasized the risk of broader global conflicts arising from Middle Eastern tensions primarily through disruptions in energy supplies, which may extend its impact to broader commodity markets.
Although inflation and Federal Reserve monetary policy tightening were mentioned, these were considered less frequently than in earlier assessments. Those still citing inflation as a risk believe the improvements in inflation data might still be insufficient to reach the Federal Reserve's dual mandate targets in the short term.
The report also canvassed opinions on global trade risks, with less than 35% citing it as prominent, equal to those who still emphasized inflation risks. Concerns remained over retaliatory protectionist policies potentially ignited by tariff barriers, possibly escalating global inflationary pressures and dampening economic activity.
Additionally, data collected through SEC Form PF highlighted hedge funds utilizing leverage at their highest levels since 2013. There was a noted increase in both on-balance sheet leverage and the average gross leverage rate among hedge funds, reaching approximately 10 times at the start of the year. Moreover, stablecoins, a cryptocurrency asset pegged to fiat currencies, saw substantial growth, with market capitalization crossing $170 billion by early November. Despite their relatively limited influence on the U.S. economy, their rapid expansion accents the sector’s latent potential for voluminous growth.