In a speech today on financial stability, Federal Reserve Governor Lisa Cook said private credit, stablecoins, cyber threats and artificial intelligence are four areas she is monitoring closely as potential risks. Also, addressing monetary policy, Cook said she favors a more cautious approach to future cuts in the federal funds rate.
Private credit has grown in the U.S. from roughly $500 billion in 2016 to more than $1.5 trillion at the end of 2023, making it comparable in size to both the high-yield bond and leveraged loan markets, Cook said. Because of its role in credit creation, “private credit has become a more macro-relevant sector that can transmit shocks through the real economy in the same way as shocks to other material sources of nonfinancial credit.”
Stablecoins are pegged to a reference asset that make them structurally vulnerable to runs, Cook said. “If a run on a large stablecoin were to occur, liquidation of the assets backing the stablecoin could be disruptive, especially if those assets were linked to other funding markets, like commercial paper or certificates of deposit.”
Cook pointed to recent cyberattacks and other disruptive cyber events as illustrations of the potential risks both pose. As for artificial intelligence, Cook said that while generative AI can be a powerful tool for executing different trading strategies, it “could generate or exacerbate the same dynamics seen during the flash crash of 2010 and similar crashes that occurred before recent advances in GenAI.”
In terms of monetary policy, Cook noted that the Federal Open Market Committee has trimmed the target range for the federal funds rate by 100 basis points of rate cuts since September. “All along, I envisioned moving more quickly in the early stages of our easing campaign and then easing more gradually as the policy rate came closer to neutral,” she said. “In addition, since September, the labor market has been somewhat more resilient, while inflation has been stickier than I assumed at that time. Thus, I think we can afford to proceed more cautiously with further cuts.”
