WASHINGTON–Potential changes to the role of U.S. financial assets as a “safe haven” might affect financial stability both domestically and internationally and is “crucial to examine,” according to one Federal Reserve governor.
Fed Gov. Adriana D. Kugler told the 2025 Federal Reserve Board Macro-Finance Workshop in the nation’s capitol she has begun monitoring the “financial stability implications of the potential lower desirability of U.S. financial assets in flight-to-safety events.”
The perception of the U.S. and American financial assets as safe havens have been affected by some Trump administration policies, including tariffs.
Signs to Watch
According to Kugler, there have been several signs of lower desirability for U.S. financial assets, including:
- A rising “VIX” (the Chicago Board Options Exchange ICBOE) Volatility Index, which measures the stock market’s expectation of volatility based on S&P 500 index options)
- Declining stock prices
- Rising long-term yields from U.S. Treasuries
- A depreciating U.S. dollar against the currencies of advanced foreign economies, “with a notable role for the Euro.”
‘Historic Relationships’
“Importantly, the historical relationships and the observed moves in the VIX and interest rates of AFEs would have been associated with a decrease in long-term yields from U.S. Treasury securities and an appreciation of the dollar,” Kugler remarked, adding she also shares concerns over stress being felt in the U.S. commercial real estate market.
“The CRE sector continues to face challenges from low vacancy rates and valuation losses, especially in urban centers for the office sector,” Kugler told the meeting. “Another challenge is that some banks, insurers, and securitization vehicles continued to have concentrated exposures to CRE. As we have seen in past crises, such as the Global Financial Crisis, vulnerabilities in specific sectors can have far-reaching consequences for the financial system. Understanding potential vulnerabilities and potential domino effects are vital for maintaining overall economic stability and crafting preemptive policies.
‘Increasingly Crucial’
“As global economic tensions rise and supply chains evolve, understanding how a company’s financial health intersects with its international trade exposure becomes increasingly crucial,” Kugler continued. “This research could provide valuable insights for both policymakers and business leaders navigating an uncertain global economic landscape.”