Federal Reserve officials raise concerns about financial stability risks, warning that asset prices may face significant pullback.

Federal Reserve officials have recently emphasized the risks to financial market stability in public speeches, warning that asset prices may face a significant correction. This discussion has become a new focal point in the debate about whether to continue cutting interest rates in the future. With the December meeting approaching, the decision-making path has become more complicated due to data deficiencies caused by inflation, employment, and government shutdown. Fed Governor Lael Brainard did not clearly state the short-term interest rate policy direction in a speech at Georgetown University on Thursday, but she pointed out that the financial system is facing new potential risks, including rapid expansion of the private credit market, hedge funds engaging in highly leveraged trading in the US bond market, and the use of generative artificial intelligence to accelerate algorithmic trading. Brainard stated that asset prices in the US are at historic highs, and she "does not rule out the possibility of an exceptionally large price decline." While a decline in asset prices itself does not equal financial instability, she believes that "the likelihood of a significant correction is rising." Cleveland Fed President Loretta Mester also expressed opposition to further rate cuts at a separate event that day, citing persistently high inflation and the risk posed by excessively loose financial conditions. She noted that while rate cuts are sometimes seen as "insurance for the labor market," this insurance may come at the cost of "higher financial stability risks." Mester also believes that the banking system has sufficient capital and the household sector has a sound balance sheet, but she is closely monitoring the leverage levels of hedge funds and the growth trends in private credit. The concerns of these two officials align with the views disclosed in the minutes of the Fed's October meeting. The minutes revealed that several policymakers mentioned overvalued asset prices in financial markets and specifically warned that if market expectations regarding the prospects of artificial intelligence technology suddenly change, technology stocks could experience a disorderly and substantial decline. These concerns reflect a fierce debate within the Fed about two key issues: whether further rate cuts will lead to a further deviation from the 2% inflation target, or whether policy support is more needed for the cooling labor market. The government shutdown has resulted in key economic data being unavailable, making it more difficult for the Fed to assess the current economic conditions. Data released by the Bureau of Labor Statistics on Thursday showed that job growth in September exceeded market expectations by twice as much, but the unemployment rate rose to 4.4%. Due to the government shutdown, the next complete employment report will not be released until a week after the December meeting. After the data was released, market traders still expect that as long as there is no significant deterioration in the labor market, the Fed will likely remain on hold in December and postpone a 25 basis point rate cut until January next year.