The Fed's economists believe that stocks, homes, and commercial real estate are all overpriced.
Staff at the central bank stated that valuations are stretched and under "notable" pressure.
They provided a bullish forecast for the US economy, but warned of financial system vulnerabilities.
Stocks, homes, and commercial property appear to be overpriced, and there is a high chance that their prices may decrease, according to Federal Reserve experts.
"The staff noted significant asset valuation pressures." The staff specifically emphasized that values in equities, housing, and commercial real estate were high," according to the minutes from the Fed's meeting three weeks ago, which were published on Tuesday.
The US Federal Reserve's economists remarked that both stock valuations and housing prices have reached historic highs.
"The forward price-to-earnings ratio for S&P 500 companies rose to the top 25% of its historical distribution," the report stated. "House prices increased to the upper end of their historical range, relative to fundamentals, despite tight credit conditions in the mortgage market."
Staffers at the Fed also expressed concern that commercial property valuations appeared to be high. "While CRE prices declined, valuations remained stretched, with capitalization rates remaining near historical lows," according to the report.
The office sector continued to suffer from the transition to remote working, according to the in-house economists, and default rates on commercial mortgage-backed securities grew as more people failed to return their office and retail loans on time.
Several market pundits have cautioned that asset values are in a bubble and are doomed to burst, especially given that the Fed has raised interest rates from near zero to more than 5% since last spring in order to combat inflation.
Higher interest rates encourage saving over spending and raise borrowing costs, which can reduce demand for companies' services and result in higher debt interest payments. They also increase the yields on risk-free assets such as Treasuries, reducing the relative attractiveness of stocks, real estate, and other risky assets.
Furthermore, the rate hikes have increased mortgage rates to their highest levels in more than two decades. As a result, the housing market has been stuck as priced-out purchasers wait for better bargains and prospective sellers hold on to the lower rates they've locked in.
In the debt-ridden commercial real estate sector, lenders have pulled back in fear of a surge in defaults or a new wave of deposit withdrawals, resulting in a painful combination of dropping property prices, increased interest rates, and a credit constraint.
Because of these pressure points, Fed workers identified "notable" vulnerabilities in the US financial system, such as funding concerns and the degree of leverage in the financial industry. They also warned of "moderate" vulnerabilities associated with corporate and family debt.
Nonetheless, they do not expect a recession given the economy's recent solid growth, low unemployment, lowering inflation, and resilient consumer spending.
Stocks, homes, and commercial real estate may be pricing in an optimistic economic forecast, but when the Fed's own economists say they appear pricey and under pressure, investors will take notice.
The original article may be seen on Business Insider