WASHINGTON—The Federal Reserve on Wednesday highlighted rapidly rising commercial real-estate prices as an area of concern amid broadly moderating risks to U.S. financial stability.
“Valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly, and underwriting standards at banks and in commercial mortgage-backed securities have been loosening,” the central bank said in asemiannual report to Congress.
The report accompanies Fed Chairwoman Janet Yellen’s testimony to the House.
Overall, financial vulnerabilities in the U.S. financial system have moderated since the start of the year, the Fed report said. In the event of a downturn, the financial sector is positioned to be more resilient because of stronger capital positions.
The report also suggested stocks aren’t overpriced, noting the relationship in prices of equities and Treasurys is close to historical norms. As recently as May, Ms. Yellen said “equity-market valuations at this point generally are quite high.”
But Fed officials are on the lookout for any bubbles in financial markets, especially while the central bank is working to keep interest rates at historically low levels.
Areas of concern include commercial real-estate prices, underwriting standards for leveraged loans and borrowing by lower-rated businesses. In fixed-income markets, valuation pressures have eased but remain notable, the Fed said.
Exposure to the crisis in Greece, meanwhile, is seen as limited.
“Large banking firms’ direct net exposures to Greece are low, although financial vulnerabilities from the situation could become more concerning if large European counterparties were weakened by a significant deterioration in peripheral European countries,” the Fed said.
In one area of concern to markets, the Fed said liquidity in bond markets appears healthy.
The U.S. Treasury market was hit by unprecedented volatility Oct. 15, sparking concerns about the structure of Treasury markets and the growing role of high-speed trading.
“All told, while the current level of liquidity in the on-the-run interdealer market seems healthy, some aspects of price movements and liquidity metrics in this market warrant careful monitoring,” the report said.
Write to author Jeffrey Sparshott at [email protected].
“Valuation pressures in commercial real estate are rising as commercial property prices continue to increase rapidly, and underwriting standards at banks and in commercial mortgage-backed securities have been loosening,” the central bank said in asemiannual report to Congress.
The report accompanies Fed Chairwoman Janet Yellen’s testimony to the House.
Overall, financial vulnerabilities in the U.S. financial system have moderated since the start of the year, the Fed report said. In the event of a downturn, the financial sector is positioned to be more resilient because of stronger capital positions.
The report also suggested stocks aren’t overpriced, noting the relationship in prices of equities and Treasurys is close to historical norms. As recently as May, Ms. Yellen said “equity-market valuations at this point generally are quite high.”
But Fed officials are on the lookout for any bubbles in financial markets, especially while the central bank is working to keep interest rates at historically low levels.
Areas of concern include commercial real-estate prices, underwriting standards for leveraged loans and borrowing by lower-rated businesses. In fixed-income markets, valuation pressures have eased but remain notable, the Fed said.
Exposure to the crisis in Greece, meanwhile, is seen as limited.
“Large banking firms’ direct net exposures to Greece are low, although financial vulnerabilities from the situation could become more concerning if large European counterparties were weakened by a significant deterioration in peripheral European countries,” the Fed said.
In one area of concern to markets, the Fed said liquidity in bond markets appears healthy.
The U.S. Treasury market was hit by unprecedented volatility Oct. 15, sparking concerns about the structure of Treasury markets and the growing role of high-speed trading.
“All told, while the current level of liquidity in the on-the-run interdealer market seems healthy, some aspects of price movements and liquidity metrics in this market warrant careful monitoring,” the report said.
Write to author Jeffrey Sparshott at [email protected].