According to a latest update from the US Federal Reserve, a slowdown in economic activity in the United States could have wide-ranging financial and economic effects and prompt further declines in asset prices. Adverse dynamics could be amplified if interest rates rose at the same time. In the near term, higher interest rates could raise consumer borrowing costs and strain household budgets, increasing the potential for delinquencies. Debt-servicing costs for governments and corporations would similarly increase, which could amplify existing vulnerabilities linked to high leverage and upcoming refinancing needs. Collectively, these factors could lead to fair value losses on fixed-rate securities among financial intermediaries, which, in turn, could reduce the supply of credit to the economy, further weighing on economic activity.
Fed noted in its financial stability report that a pronounced economic slowdown in major advanced and emerging economies could weigh on investor, business, and consumer sentiment and prompt a broader pullback from riskier assets or those with elevated valuations, increasing volatility in financial markets and raising the potential for market dislocations. Weaker-than-expected economic activity could also erode the fundamentals of some businesses and households by broadly reducing the outlook for revenue and income growth, impairing their ability to service debt and raising the potential for defaults and delinquencies.