Dollar weakens as cautious Fed leads to rate-hike rethink

Dollar weakens as cautious Fed leads to rate-hike rethink

Dollar weakens as cautious Fed leads to rate-hike rethink

Wednesday's report is the latest evolution in the Fed's efforts to spotlight financial stability monitoring and follows years of more intense in-house research. As of Wednesday afternoon, Trump was silent concerning Powell's comments at the Economic Club, later firing off some additional tweets about GM and tariffs.

The report is the first of what the Fed intends as a twice yearly review of risks to financial stability, defined as the degree to which the financial system can continue to lend to businesses and households even when subjected to an outside shock.

Drawing lessons from the 2008 global financial crisis, the semiannual report, which includes a summary of the Fed's framework for assessing the resilience of the US financial system, represents the central bank's latest effort to strengthen financial monitoring.

Publishing the report regularly bolsters the Fed's ongoing moves towards greater public transparency about how the central bank uses its broad powers - a step Powell has said is important to sustain the Fed's continued independence from elected officials in setting monetary policy.

The Bank of England warned on Wednesday that Britain risked a bigger hit to its economy than it suffered from the global financial crisis a decade ago if it leaves the European Union in a "disorderly" manner, which would include a 25 per cent crash in the value of the pound.

The report noted several ways in which the financial system is well-buffered against unexpected shocks.

"High leverage has historically been linked to elevated financial distress and retrenchment by businesses in economic downturns", the Fed said in a section of its report highlighting how indebted companies are borrowing even more money. But market watchers have been hoping for relief in the wake of stock market volatility in recent weeks that was due in part to worries about the Fed. It cited the strong capital position of banks, household borrowing generally in line with incomes, and a system now less vulnerable to the sort of runs or credit crunches that almost shut down the global economy in the 2007 to 2009 financial crisis.

The Fed also cautioned that escalating trade tensions could lead to a "particularly large" drop in asset prices because "valuations appear elevated relative to historical standards". Low interest rates were deemed necessary to help the economy recover, but many economists have agreed that as things improve, interest rates need to rise to avoid inflation. It comes as financial markets are grappling with signs that growth is slowing as rising interest rates ripple through the economy. But default rates remain low and the cost of debt service as a share of earnings has been level and near a 20-year low.

The report signaled less concern about borrowing by households and by risks in the banking sector, which is regulated by the Fed, among others.

USA equity markets opened higher and their gains accelerated after Powell spoke.

"My own assessment is that, while risks are above normal in some areas and below normal in others, overall financial stability vulnerabilities are at a moderate level", Powell said.

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