Financial markets experience strains on market liquidity amid Russia-Ukraine conflict: US Fed report

WASHINGTON - Amid Russia-Ukraine conflict and elevated inflation, financial markets experienced high volatility and some strains on market liquidity, US Federal Reserve said in a report Monday.

In the near term, the conflict and related events are likely to create "additional upward pressure" on inflation and weigh on economic activity, the Fed said in its semi-annual Financial Stability Report.

The report noted that inflation has been higher and more persistent than expected, even before the conflict in Ukraine, and uncertainty over the inflation outlook "poses risks" to financial conditions and economic activity.

"Banks remained well-capitalized, but some money market and bond funds are still exposed to sizable liquidity risks," the report said, noting that a few signs of funding pressures emerged amid the escalation of geopolitical tensions.

The Fed report noted that funding risks at domestic banks remained low as a result of large holdings of liquid assets and a limited reliance on short-term wholesale funding.

However, it warned that some types of money market funds and stablecoins - a digital currency that's designed to maintain a steady value in relation to stable reserve asset like the US dollar - "remain prone to runs," and many bond and bank loan mutual funds "continue to be vulnerable to redemption risks."

Broad funding markets proved "resilient," and spillovers have been "limited" to date, according to the report.

In a separate statement, Fed Governor Lael Brainard said Russia-Ukraine conflict has sparked large price movements and margin calls in commodities market and "highlighted a potential channel through which large financial institutions could be exposed to contagion."

"From a financial stability perspective, since most participants access commodities futures markets through a large bank or broker-dealer that is a member of the relevant clearing house, these clearing members are exposed to risk when clients face unusually elevated margin calls," Brainard said.