Fed says Iran war and oil shock are now the biggest risks to financial stability
The Federal Reserve says geopolitical risk and the oil shock linked to the Iran war have become the biggest threats to financial stability, overtaking other concerns in its latest report.
Geopolitical risk and the oil shock triggered by the war with Iran have surged to the top of the Federal Reserve’s list of financial stability concerns, according to its latest semi-annual Financial Stability Report released on Friday. The report found that around 75% of respondents cited geopolitical risk as a leading worry, while 70% pointed to the oil shock. Concerns over artificial intelligence and private credit have also become more prominent, with about half of respondents flagging each as a potential threat.
The Fed said a prolonged Middle East conflict, especially if accompanied by commodity shortages and further supply-chain disruption, could push inflation higher and weaken growth in the United States and elsewhere. It also warned that sharp moves in energy prices and related financial products could create strains across markets. Some respondents said the inflationary pressure created by the energy shock might leave central banks under pressure to tighten policy even as growth slows.
The findings broadly echo concerns already voiced by many Fed policymakers in recent weeks. The central bank kept interest rates unchanged at its latest meeting, but officials have since said they cannot rule out further tightening if inflation continues to rise and spreads more broadly through the economy. The report warned that higher inflation and interest rates could have significant financial and economic consequences, including falls in asset prices.
The shift in sentiment has been driven in part by the scale of the energy shock. Reuters reported that the global oil benchmark has risen by more than 50% since the US-Israeli attacks on Iran began on February 28, and remains above US$100 a barrel. The “oil shock” was the second most-cited concern in the survey after not being mentioned at all in the previous report last autumn. US petrol prices have climbed to their highest level since July 2022, helping to push inflation to roughly one percentage point above the Fed’s 2% target.
The report also highlighted rising unease around AI and private credit. Survey respondents said AI investment is increasingly being financed by debt, raising leverage and potentially adding fragility, while widespread adoption could also contribute to labour-market weakness. On private credit, the Fed said risks still appear limited and manageable, although persistent redemptions and negative sentiment could reduce access to borrowing for riskier companies.
Source: Reuters
