The bank also highlighted the large fluctuations in asset prices—from treasuries to stocks—as investors revaluate risk in a high-inflation environment.

“Inflation has been higher and more persistent than expected, even before the invasion of Ukraine, and uncertainty over the inflation outlook poses risks to financial conditions and economic activity," the Fed said in its report.

The Fed said persistently high inflation may require central bankers to quickly raise interest rates, which could also be a potential risk for financial instability in the form of lower economic output as well as higher borrowing costs for individuals and businesses.

It could cause debt levels, which the Fed says are elevated but not yet a major concern, to become unsustainable for some businesses.

"Further adverse surprises in inflation and interest rates, particularly if accompanied by a decline in economic activity, could negatively affect the financial system,” the bank said.

Fed governor Lael Brainard also cited the recent volatility in the commodity markets as a place of potential risk. While gyrations in the energy market have made headlines for several weeks now, there have been other commodity markets—particularly those for industrial metals like nickel, zinc and lithium—that have seen large fluctuations.

“The Federal Reserve is working with domestic and international regulators to better understand the exposures of commodity market participants and their linkages with the core financial system,” she said.

Fibre2Fashion News Desk (DS)