Federal Reserve sees financial stability threat increasing

The Federal Reserve sees more threats to financial stability. It is clear from the Minutesn Released this week, the central bank is more concerned about rising prices of real estate and financial assets such as stocks and bonds.

The Federal Reserve is cautious in its wording, but the fact that these risks are being discussed is enough for the well-informed investor to be cautious. Experience has taught us that the central bank does not dare to name the risks until very late and that it is usually too late to turn the tide.  For example, just before the outbreak of the housing market crisis in the United States, Ben Bernanke claimed that there were no bubbles in the economy.

Investors aren't impressed by anything anymore (Source: Bank of America)

Real estate

In the minutes, we read that the Federal Reserve is concerned about high valuations for commercial real estate and possible reforms in mortgage lending. A big drop in real estate prices could jeopardize financial stability, just as it did in the U.S. housing market a decade ago. Many banks and insurers got into trouble because they had bad loans on their balance sheets that no one dared to value anymore.

It is therefore perhaps no coincidence that the Federal Reserve is once again postponing the planned interest rate hike. If interest rates rise too quickly, this could cause another recession with all the consequences that this entails for the housing market.

Shares

Not only are house prices rising as a result of extremely low interest rates, but so are stock prices. Research by Bank of America shows that the broad-based S&P 500 index is currently strongly Overvalued is. Of the 20 most commonly used methods to value the stock market, no less than 18 indicate that there is currently an overvaluation in the market.

Low interest rates and asset price increases have made consumer confidence and investor sentiment very positive again. It is precisely under these circumstances that you as an investor can become a little more cautious and adopt a more defensive investment strategy.

U.S. stock market overvalued by most criteria (Source: Bank of America)

Federal Reserve sees financial stability threat increasing