NEW YORK, April 3 (Reuters) - High asset prices and growing economic pressure from U.S. fiscal stimulus mean financial markets may be particularly vulnerable to an unexpected shock, an influential Federal Reserve governor said on Tuesday, warning the central bank could respond with stronger requirements on banks as needed.
Fed Governor Lael Brainard said that for now risks to the U.S. financial system are “moderate” thanks in part to guard rails adopted in the wake of last decade’s crisis and recession. But with tax cuts and government spending risking a “booming” economy, she said the Fed would raise banks’ capital buffers if vulnerabilities are shown to grow.
“Valuations seem stretched and cyclical pressures are building,” Brainard, one of only three Fed governors, said at NYU’s Stern School of Business.
“In such circumstances asset prices might be particularly susceptible to an unexpected development that accentuates downside risks to the macroeconomic outlook,” like concerns about high inflation or uncertainty about U.S. policy, she said.
Reporting by Jonathan Spicer; editing by Diane Craft