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Fed sees steady economy, only 'moderate' financial vulnerabilities

Fed sees steady economy, only 'moderate' financial vulnerabilities
From Reuters - July 7, 2017

WASHINGTON The U.S. economy continues to churn out jobs and grow at a steady pace, with investment and consumer confidence both healthy and only moderate signs of risk in financial markets, the U.S. Federal Reserve said on Friday in its semiannual report to Congress.

With stock markets near record levels, and interest rates and credit conditions still loose, the report gave detailed attention to whether the financial system and bond markets posed any particular threat to the country's eight-year economic expansion.

The answer so far is no, said the Fed, noting that there is little evidence of a liquidity crunch in the corporate or other bond markets, and no evidence that rising asset values pose a problem. The structure of the corporate bond market is changing with new regulations, the Fed said, but by traditional measures shows only minimal strain in adapting.

"Vulnerabilities in the U.S. financial system remained, on balance, moderate," concluded the report, submitted to Congress on behalf of the Fed's Washington-based Board of Governors. "Valuation pressures across a range of assets and several indicators of investor risk appetite have increased further...However, these developments in asset markets have not been accompanied by increased leverage."

The combination of rising asset values and rising leverage is considered particularly toxic, indicating that investments are being made with borrowed money and leaving investors unable to repay those debts if the value of the underlying assets decline.

U.S. Treasury yields rose after the report, with the yield on the benchmark 10-year note near a more than eight-week high. U.S. stocks edged higher.

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