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The Fed - Statement by Governor Brainard, May 6, 2021

Financial Stability Report
Statement by Governor Lael Brainard
The latest Financial Stability Report provides valuable analysis to track increases in financial system
vulnerabilities. I would highlight a few areas. Vulnerabilities associated with elevated risk appetite are rising.
Valuations across a range of asset classes have continued to rise from levels that were already elevated late
last year. Equity indices are setting new highs, equity prices relative to forecasts of earnings are near the top
of their historical distribution, and the appetite for risk has increased broadly, as the "meme stock" episode
demonstrated. Corporate bond markets are also seeing elevated risk appetite, and the spreads of lower
quality speculative-grade bonds relative to Treasury yields are among the tightest we have seen historically.
The combination of stretched valuations with very high levels of corporate indebtedness bear watching
because of the potential to amplify the effects of a re-pricing event.
The FSR describes the failure of Archegos Capital Management and the associated losses at a number of
large banks. It highlights the potential for nonbank financial institutions such as hedge funds and other
leveraged investors to generate large losses in the financial system. 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. The potential for material distress at hedge funds to affect
broader financial conditions underscores the importance of more granular, higher-frequency disclosures.
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. With valuations and risk appetite at elevated levels, strong
microprudential safeguards and macroprudential tools such as the Countercyclical Capital Buffer will be
important to address risks to financial stability and enable monetary policy to focus on its maximum
employment and average inflation goals.

Last Update: May 06, 2021