Source: Caixin News Agency

On Friday local time, the Federal Reserve released its semi-annual monetary policy report. It mentioned that the overall economic conditions in the United States are positive, and the financial system remains stable and resilient. Next week, Federal Reserve Chairman Powell will visit Capitol Hill to address lawmakers' inquiries, which could be highly significant for the current global financial markets.

At the time of report release, the Fed is dealing with a highly uncertain environment as Trump considers or enacts significant policy changes. In the most recent semi-annual "performance report," Federal Reserve officials affirmed their commitment to lowering the inflation rate to 2%. They also indicated that regarding changes in interest rate policy, officials would "carefully assess the forthcoming data, the evolving outlook, and the balance of risks."

The report states that amidst a stable and more balanced job market, alongside declining inflationary pressures, the overall economic performance of the United States is positive.

In general, the financial system is described as "stable and resilient". However, the report also highlights that valuations in various markets such as stocks, corporate debt, and residential real estate remain high relative to underlying fundamentals.

In fact, asset prices have reached historically high levels and continue to face upward pressure recently, while noting that "the vulnerabilities associated with financial leverage remain significant."

The report does not suggest a significant economic threat from the financial system. It notes that credit is readily available to medium and large enterprises, most households, and local governments, but highlights that credit for small businesses and those with credit challenges is relatively constrained.

Overall borrowing levels for households and non-financial enterprises, as a percentage of Gross Domestic Product (GDP), continue to decrease, and are currently at an unusually low level compared to the past twenty years.

Most banks report that their capital levels are still significantly above regulatory requirements and have decreased their dependence on uninsured deposits; however, some banks continue to experience substantial fair value losses on fixed-rate assets.

Regarding funding risk, while the reforms of money market funds (MMFs) by the U.S. Securities and Exchange Commission in 2023-2024 have somewhat reduced the vulnerabilities of major MMFs, other less regulated short-term investment instruments remain prone to shocks with poor transparency, and their asset sizes are still increasing. Additionally, hedge funds seem to exhibit higher leverage ratios that are also concentrated.

Last year, amidst easing inflation pressure, the Federal Reserve managed to reduce its benchmark interest rate by 100 basis points. However, future rate cuts are confronted with significant uncertainty due to Trump's trade and labor policies, which most economists predict will fuel inflation when price pressures remain above target levels. Some officials from the Federal Reserve explicitly stated that the government represents a source of uncertainty, constraining the guidance they can offer regarding the monetary policy outlook.

The Federal Reserve's report offers limited commentary on the outlook for Trump's trade policy, but notes that "some market participants have pointed out that the potential increase in U.S. import tariffs is a factor that has contributed to the dollar's strength in recent months."