(Bloomberg) -- Asset valuations are stretched across a broad set of financial markets and some cryptocurrencies have witnessed “extreme volatility,” Federal Reserve Governor Lael Brainard said, though overall risks to the financial system are still low.
“Estimates of risk premiums and spreads in a range of markets remain narrow by historical standards,” Brainard said Tuesday in prepared remarks at New York University's Stern School of Business.
She said corporate bond yields are low, while spreads on high-yield bonds over Treasuries are near the low-end of their historical range.
“One area that the Federal Reserve is monitoring is the extreme volatility evidenced by some cryptocurrencies,” she said. “For instance, Bitcoin rose over 1,000 percent in 2017 and has fallen sharply in recent months.”
While these markets may raise important investor and consumer protection issues, she said it was less clear if they could pose a threat to financial stability.
U.S. central bankers have raised the benchmark lending rate six times since December 2015, yet the actions have had little bite on financial conditions as stocks continued to rise and credit spreads remain narrow. Brainard discussed a range of Fed tools during her speech, particularly market surveillance, stress tests and strengthening of the banking system with higher capital requirements.
Given tight valuations now, “asset prices might be particularly susceptible to an unexpected development that accentuates downside risks to the macroeconomic outlook,” Brainard said, citing the potential for high inflation or policy uncertainty that boosts Treasury yields.
Tax cuts and government spending signed by President Donald Trump “should boost the economy” the at a time when it is close to full employment.
“It is hard to know with precision how the economy is likely to respond,” Brainard said. “Historically, such episodes tended to see a risk of accelerating inflation in earlier decades or a risk of financial imbalances in more recent decades.”
To contact the reporters on this story: Craig Torres in Washington at ctorres3@bloomberg.net, Jeanna Smialek in New York at jsmialek1@bloomberg.net.
To contact the editors responsible for this story: Alister Bull at abull7@bloomberg.net, Brendan Murray
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