MNI BRIEF: Fed's Cook - Greater Odds Of Asset Price Declines

Federal Reserve Governor Lisa Cook on Thursday said the financial system remains resilient, supported by strong balance sheets among households and businesses and high capital levels across the banking system, but there are risks, including the increased likelihood of outsized asset price declines. 

"The financial system remains resilient," Cook said in prepared remarks. "Yet, vulnerabilities from elevated asset values, growth and complexity in private credit markets, and the potential for hedge fund activity to contribute to Treasury market dislocation warrant attention." 

Financial stability is a focal point of her attention at the Fed Board of Governors, since she serves as chair of the Board’s Committee on Financial Stability. Cook said she is considering potential financial system vulnerabilities through the lens of how it might constrain the Fed's ability to attain its dual-mandate goals of maximum employment and price stability.

"Currently, my impression is that there is an increased likelihood of outsized asset price declines," she said. "However, given the system’s overall resilience, I do not see the kinds of weaknesses that played out so painfully in the Great Recession, and, thus, I do not see potential asset price declines as posing risks to the financial system."

She also touched on potential vulnerabilities from private credit, which are not subject to the same public scrutiny—auditing and disclosure standards—as their public counterparts. "We should expand the lens and inspect this funding vehicle more closely," Cook said. (See: MNI INTERVIEW: Private Credit Poses Systemic Risks - Ghamami) 

"Default rates remain low, but they are a backward-looking measure and could also reflect increased usage of payment-in-kind arrangements, or PIKs; loan amendments; and distressed exchanges," she added in her remarks for an event at Georgetown University.