Dive Brief:

• Strains to market liquidity, Russia’s invasion of Ukraine and persistent price pressures pose the biggest short-term risks to financial stability, the Federal Reserve said, citing a survey.
• The $24 trillion U.S. Treasury market, although functioning smoothly, “appears to be less resilient than is typical,” the central bank said in a report on threats to financial stability. “Liquidity strains appear to be primarily a consequence of the elevated interest rate volatility associated with the uncertainty about the economic outlook.”
•  “Today’s environment of rapid synchronous global monetary policy tightening, elevated inflation and high uncertainty associated with the pandemic and the war raises the risk that a shock could lead to the amplification of vulnerabilities, for instance due to strained liquidity in core financial markets or hidden leverage,” Fed Vice Chair Lael Brainard said in a statement.

Dive Insight:

CFOs in the U.S. and several countries have seen borrowing costs surge and financial markets convulse this year as the Fed, European Central Bank, Bank of England and other central banks press on with a rapid withdrawal of record stimulus.

The Fed, seeking to quash the worst inflation in nearly four decades, raised the main interest rate 0.75 percentage point on Wednesday, the fourth straight increase of that size in as many meetings. The yield on the 10-year Treasury note — a benchmark for corporate and other kinds of borrowing — has risen to 4.2% from 1.6% at the start of this year.

Fed Chair Jerome Powell said at a post-decision press conference that, although the pace of future tightening may slow, policymakers “have some ground left to cover” and may ultimately raise interest rates higher than they forecast in September.

More than three out of five (62%) finance professionals and academics surveyed by the New York Fed identified persistent inflation, monetary tightening and Russia’s invasion of Ukraine as the biggest risks to market stability, the Fed said.

More than half of respondents (54%) flagged liquidity strains and volatility in financial markets, as well as higher energy prices, as salient risks, the central bank said.

“It’s important to remain attentive to the risks raised in the report and to work with domestic and international regulators to support the resilience of the financial system,” Brainard said.

The strength of the dollar and economic stresses in China — as well as tensions between China and Taiwan — could jar U.S. financial markets, according to survey respondents.

The U.S. Dollar Index — which tracks movement of the greenback compared with a basket of six major currencies — has increased more than 14% this year to the highest level since the early 2000s. Meanwhile the Japanese yen, euro and British pound have fallen.

New York Fed “contacts expressed increased concern about market functioning, including the possibility of disorderly markets and extreme volatility,” the central bank said in the stability report.