The Federal Reserve warned of several new risks to the U.S. financial system—including market volatility caused by meme stocks and a potential spillover from China’s real estate troubles—in its semiannual financial stability report released late on Monday.
Concerns over higher inflation and tighter monetary policy have risen since earlier this year and are now the top worry for investors, with roughly 70% of experts surveyed by the Fed flagging it as the main risk to financial stability.
The second most common concern—with over 50% of respondents—was over vaccine-resistant Covid-19 variants derailing the economic recovery, though that fell slightly since May, the last time the Fed published its financial stability report.
At the same time, the Federal Reserve also flagged several new types of potential risks to the financial system which merit attention and have recently emerged as top investor concerns, including the growing interest in “so-called meme stocks.”
A large group of younger retail investors, spurred by zero-cost brokerages and discussion on social media, have been investing heavily in meme stocks and cryptocurrencies, a trend which can cause stock market volatility in the future, the Fed pointed out.
Another big risk—now the third-highest concern for investors according to the Fed—is China’s regulatory crackdown, and especially the troubles in its real estate sector, which could cause a “spillover” into U.S. markets.
Property development giant China Evergrande has been attempting to avoid defaulting on its debt since this summer, causing wider damage to Chinese real estate stocks and raising investor concerns about the world’s second-largest economy.
“Fiscal and monetary policy accommodation, along with continued progress on vaccinations, continued to support a strong economic recovery,” the report said. “Despite the tragic human toll, the Delta variant has left a limited imprint on U.S. financial markets.”
“Social media can contribute to an echo chamber in which retail investors find themselves communicating most frequently with others with similar interests and views, thereby enforcing their views, even if these views are speculative or biased,” the Federal Reserve warned about meme stocks in its latest report. While wild surges in stocks like GameStop and AMC have had a “limited” impact on financial stability so far, this area of the market should be “monitored” further, the report stated.
“Since the previous survey results published in May, concerns related to inflation, new COVID variants, and elevated risk-asset valuations have remained top of mind, while several new risks have surfaced, including possible fallout from Chinese regulatory changes,” the central bank said in its report. The Fed’s previous financial stability reports have mentioned China before, warning that its high debt levels and “stretched real estate prices” could adversely affect the U.S. economy.