OFR Finds Elevated Threats to U.S. Financial Stability Due to Inflation, Tighter Credit, and Geopolitical Uncertainties
Published: January 12, 2023
Contact: OFR Public Affairs
WASHINGTON – The OFR published its 2022 Annual Report to Congress today, which concluded that macroeconomic conditions and geopolitical uncertainties elevated risks across the financial system last year. The report examined these risks to financial stability between October 1, 2021 – September 30, 2022.
“Mortgage lending, access to credit, and retirement savings are among the many vital services American households and businesses rely on, all of which require a resilient financial system,” said James Martin, the OFR’s Deputy Director of Operations performing the duties of the Director. “The OFR’s 2022 Annual Report to Congress examined the headwinds posed by the macroeconomic and geopolitical environment and the risks stemming from market volatility and evolving technology, all of which could threaten our economic resilience. We hope the report serves as a resource for policymakers a nd others responding to these risks.”
The OFR’s 2022 Annual Report to Congress found overall threats to U.S. financial stability were elevated compared to last year. The 2022 report discussed how the systemic risk landscape was elevated as financial institutions faced more uncertainty from rising inflation, tight credit conditions, and the geopolitical landscape. The report also looked at the emerging threats posed by non-traditional risks, such as cybersecurity, digital assets, and climate-related financial risks.
In its 2022 Annual Report to Congress, the OFR highlighted key findings, including:
U.S. economic growth slowed. Inflation and a spike in commodity prices hamper globalgrowth prospects.
The U.S. economic growth has slowed as financial conditions tightened in part due to interest rate hikes and quantitative tightening. The U.S. labor market remains strong, but other labor forces and employment measures are below pre-pandemic levels. Higher inflation in the post-pandemic global economy, coupled with a dramatic rise in commodity prices following Russia’s war against Ukraine, have hampered global growth prospects. Globally, central banks are raising interest rates to fight inflation but must balance this against the risk of overtightening.
Tighter financial conditions expose credit risk vulnerabilities.
Nonfinancial firms with floating-rate debt or near-term maturities, particularly those in technology, healthcare, and the energy sectors, face larger financing burdens from rising interest rates. Household leverage remains at historically low levels; however, conditions have deteriorated for some due to inflationary pressures. Rapidly rising mortgage rates have also dampened home price appreciation and slowed mortgage activity.
Fixed-income and equity investors experienced large losses from a sharp increase in risk-free rates and may face more declines if market sentiment deteriorates.
The U.S. Treasury market volatility was elevated, and liquidity remained tight amid monetary policy uncertainty. Generally, bond market stress measures are comparable to March 2020 and the early days of the 2007-09 financial crisis. Short-term funding market conditions have tightened as investors become more risk averse amid economic and monetary policy uncertainty. Structural vulnerabilities remain in some segments of the short-term funding market, such as money market funds and other cash-management vehicles.
In the 2022 report, the OFR also highlighted two initiatives to fill gaps in financial data and provide data to the Financial Stability Oversight Council (Council) and member agencies. The report discussed the OFR’s efforts to increase transparency in the non-centrally cleared bilateral repurchase agreement market and the OFR’s efforts to create a collaboration space for Council member agencies that is equipped with data, high-powered computing, and analytic tools.
The OFR helps promote financial stability by looking across the financial system to measure and analyze risks, perform essential research, and collect and standardize financial data principally to support the Financial Stability Oversight Council and its member agencies. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act requires the OFR to analyze threats to the financial stability of the United States each year and provide a report to Congress with its key findings.