Will the Fed’s tightening trigger financial instability?

The recent liquidity issues faced by UK pensions funds and problems at a few European banks have led to speculation that the Fed’s interest rate hikes will trigger some form of financial instability which, via an adverse feedback loop, could turn what might otherwise be a mild recession into something far worse. We certainly wouldn’t rule out the possibility. For a start, given the massive surge in borrowing costs faced by businesses and households, a rise in bankruptcies is inevitable. But, to our eyes, there are no obvious systemic dangers in the domestic financial system.

We track potential flash points in our US financial and economic risk dashboard, available on our data portal here.