Federal Reserve officials are growing more uneasy about the state of U.S. financial markets, warning that elevated asset prices, opaque private credit markets, and debt-fueled artificial intelligence investment could leave the economy vulnerable.
Minutes from the Fed's April 28-29 policy meeting showed that staff and several policymakers viewed financial vulnerabilities as "notable," according to Reuters. The concerns come as Kevin Warsh was sworn in as Fed chair, succeeding Jerome Powell at a moment when markets are flashing mixed signals.
Fed staff said asset valuation pressures remained elevated, while several policymakers warned that lofty prices increased the risk of a sudden market reversal if bad news hits. Officials also raised concerns about private credit, a fast-growing corner of finance that is harder for regulators to monitor because many loans are made outside traditional banks.
The report pointed to a broader anxiety inside the central bank over whether the Fed's emergency tools are strong enough, and whether a new leadership era could change how aggressively the central bank responds to financial stress.
Warsh has criticized some of the Fed's crisis-era policies, including large-scale asset purchases, and has favored a smaller balance sheet. The Fed's own May Financial Stability Report echoed several of those concerns. It said Treasury market liquidity deteriorated during periods of heightened volatility tied to Middle East geopolitical risks, showing how quickly market functioning can become vulnerable during stress.
Liquidity later recovered, but the Fed noted that market depth in the most liquid two-year Treasury note remained near historically low levels. That matters because Treasuries are the backbone of global finance. They are used to price mortgages, corporate debt, and other assets. If Treasury trading becomes strained, stress can spread quickly across markets.
Fed officials also discussed possible improvements to liquidity tools, including the discount window, standing repo operations, and dollar swap lines with foreign central banks. The minutes said some officials favored extending swap arrangements beyond the current year, arguing that a longer extension would support financial stability.
The worries are not limited to Washington. The International Monetary Fund said in its April Global Financial Stability Report that risks are elevated because of the Middle East war, inflation pressure, tighter financial conditions, and amplification channels that could turn market turmoil into broader instability.
The IMF also noted stretched valuations, concentration in AI-related companies, and leverage among nonbank financial institutions as possible sources of stress. However, policymakers are already divided over interest rates as inflation remains stubborn, and some officials become more open to a possible rate hike.
