Fed policy report warns on possible financial sector risks
By Michael S. Derby and Dan Burns
(Reuters) — The Federal Reserve said Friday in a report that there are «notable» vulnerabilities on the financial stability front, although it added the stress banks were facing last spring has receded.
The Fed report tied the vulnerabilities to borrowing levels, noting «declines in the fair values of fixed-rate assets have been sizable relative to the regulatory capital at some banks.»
But the Fed also said, «acute stress in the banking system has receded since last spring, and banks’ regulatory risk-based capital ratios remained solid and increased broadly, as bank profits were robust and banks reduced capital distributions.»
On the economy, the Fed reiterated it was committed to getting inflation pressures back to 2% and said the rate-setting Federal Open Market Committee «does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent.»
The twice-yearly report to Congress comes ahead of two days of testimony by Fed Chair Jerome Powell set for Wednesday and Thursday next week. The report is typically a recap of economic developments and actions taken by the Fed in the period since the previous update given to lawmakers, but can offer fresh takes on some of the latest economic data and on subjects such as financial stability.
At the Fed's most recent policy meeting in January, central bank staff briefed policymakers on their assessment of stability within the U.S. financial system, and according to minutes of the meeting released last week, they «characterized the system’s financial vulnerabilities as notable.»
Powell is likely to face a barrage of lawmaker questions about the Fed's tight
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