Geopolitical tensions and the shock to global oil prices have surged to the forefront of financial stability concerns, according to a recent semi-annual report from the US central bank. The US central bank is responsible for maintaining financial stability, controlling the money supply, and setting interest rates to promote economic growth and keep inflation in check. Its Financial Stability Report, released Friday, found that geopolitical risks were cited by three-quarters of respondents as a top worry, with the oil shock stemming from ongoing conflict cited by 70 per cent. Artificial intelligence (AI) and private credit have also emerged as prominent concerns, flagged by half of the survey respondents.
The report specifically cautioned that a prolonged conflict in the Middle East, particularly if combined with commodity shortages and impaired supply chains, could fuel inflation and slow economic growth in the US and globally. Sharp price movements in energy markets could also lead to market strains. Concerns about rising oil prices and rekindled inflation largely echo sentiments from US monetary policymakers, who recently left interest rates unchanged but cannot rule out future hikes if inflation continues to broaden. Global benchmark crude oil prices have risen by over 50 per cent since late February, remaining above $100 a barrel, and US petrol prices have climbed to their highest levels since July 2022, pushing inflation roughly a percentage point above the Fed’s 2 per cent target.
Beyond energy, the report highlighted worries regarding AI investment increasingly funded by debt, potentially boosting leverage and increasing fragility, alongside fears the technology could contribute to labour market weakness. In the private credit sector, while negative sentiment and increasing redemption requests have been noted, the risks appear manageable so far. The Fed indicated that while risks from private credit currently seem “limited and manageable,” sustained redemptions and negative sentiment could reduce credit availability for some borrowers, particularly those deemed higher risk.
