Fed Governor Highlights Emerging Financial-Stability Risks

Federal Reserve Governor Lisa D. Cook described concerning vulnerabilities that warrant close monitoring, including rising asset valuations, rapid private credit growth, and hedge funds’ increasing role in Treasury trading.

In a speech at Georgetown University’s McDonough School of Business, Ms. Cook asserted that asset valuations across equities, corporate bonds, leveraged loans, and housing remain elevated relative to historical fundamentals. She said stretched prices reduce compensation for risk and increase the chances of sharp corrections. Ms. Cook warned that while she does not see a systemic threat, markets are more exposed to adverse shocks and sudden price swings.

Ms. Cook also highlighted the rapid expansion and rising complexity of private credit. She said nonbank lending to private companies has grown significantly and now relies on increasingly opaque intermediation chains. She cautioned that these structures, many untested through a full credit cycle, could spread losses in unexpected ways. She warned that this interconnectedness makes the sector more likely to transmit stress, underscoring the need for closer supervisory scrutiny.

Ms. Cook further pointed to the growing footprint of hedge funds in the U.S. Treasury market and the emerging risks from artificial intelligence in financial trading. She said hedge funds’ use of highly leveraged relative-value strategies raises the risk of rapid deleveraging. She also said AI could improve price discovery, but carries risks such as algorithmic collusion, market manipulation, and "black box" opacity. Ms. Cook warned that both leveraged hedge fund activity and AI adoption could introduce new channels of instability, reinforcing the need to monitor leverage, funding conditions, and evolving technologies across key market participants.