(Reuters) -Historically elevated prices in equities, corporate bonds, housing and leveraged loan markets may portend a large pullback in valuations, Federal Reserve Governor Lisa Cook said on Thursday, even as she predicted that any such drop is unlikely to send the whole financial system into a downward spiral.
“Currently, my impression is that there is an increased likelihood of outsized asset price declines,” Cook said in remarks prepared for delivery at an event hosted by Georgetown University’s business school. “However, given the system’s overall resilience, I do not see the kinds of weaknesses that played out so painfully in the Great Recession, and, thus, I do not see potential asset price declines as posing risks to the financial system.”
Cook, who did not touch on the economic outlook or monetary policy in any direct way in her prepared remarks, also said she does not see the fast growth in private credit as a current threat to financial stability, though she added that it’s worth keeping an eye on.
But Cook said she does see some market liquidity vulnerabilities because of the large and increasing footprint of hedge funds in Treasury securities markets.
And while the adoption of generative artificial intelligence in trading could add to financial market stability, for instance by eliminating the kind of biases that can send human traders all running for the exits at the same time, it also poses risks, she said.
“There is early evidence for both,” Cook said. “Areas to watch carefully have emerged, as well as potential ways we will benefit from this new technology.”
(Reporting by Ann Saphir; Editing by Paul Simao)
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