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The Federal Reserve can’t sit still! Besides inflation, these five major risks are "encircling" the United States!
Just this morning, the Federal Reserve released its semi-annual Financial Stability Report, ranking the risks threatening the U.S. financial system!
1. Oil Price Shock is the Current Biggest Variable
Most noteworthy is the oil price shock, which the Fed didn’t mention at all last fall (November 2025), but has now jumped to second place! The previous autumn report (November 2025) mentioned oil shocks zero times.
In half a year, the Middle East situation has rapidly escalated: the U.S. and Israel took military action against Iran on February 28, Brent crude oil stabilized above $100 per barrel, U.S. gasoline prices broke through $4 per gallon—energy shocks have thus shifted from a marginal issue to a sword hanging over the financial system.
The report warns that if the Middle East conflict becomes prolonged and supply chains are damaged, it will push up inflation in the U.S. and globally, while dragging down economic growth. Sharp fluctuations in energy markets could trigger inflation plus liquidity tightening, forcing central banks worldwide into a "stagflation dilemma."
2. Geopolitical Risks Rise to First Place
75% of surveyed institutions list geopolitical risks as their top concern. Against the backdrop of ongoing Russia-Ukraine tensions, sudden Middle East developments, and normalized U.S.-China competition, this has become a consensus anxiety in the financial sector.
Geopolitical risks and oil price shocks are essentially two sides of the same coin. Middle East conflicts are a direct reflection of geopolitical risks and also the fundamental driver of oil price shocks. The Fed views both as a combined, complex shock, which itself signals: policymakers recognize the high correlation between these risks and find it difficult to disentangle them.
3. Rising AI Bubble Risks
Mentions of AI risks jumped from 30% to 50%, climbing from fifth to third place!
More importantly, market concerns this time are not just about AI technology itself, but also about the structural fragility caused by AI companies’ heavy reliance on debt financing for expansion.
Respondents expressed worries including: increasing leverage dependence in AI investments, the impact of large-scale AI applications on the labor market, and the correlation failures caused by multiple institutions using the same AI infrastructure. The CFA Institute and BlackRock both categorize AI-related risks as "persistent vulnerabilities."
AI is a good technology, but its current expansion mode is somewhat reminiscent of the early 2000s internet bubble: massive capital inflows, high valuations, and fuzzy profit models. Once financing tightens, AI projects reliant on debt will be the first to suffer. This risk isn’t AI itself being bad, but rather the structure of capital.
4. Hidden Leverage in Private Credit
Private credit wasn’t listed separately in last year’s report, but in this year’s report, it directly rose to tie for third place (50%), representing the biggest change in risk ranking.
This sector exploded after 2008, as banks were forced to shrink their operations post-crisis, and non-bank institutions filled the gap. But private credit markets are far less transparent than public markets, making it difficult for investors to see how much risk they are actually taking on.
The Fed characterizes private credit as having limited and controllable risks, but adds a caveat: if redemption waves continue and market sentiment worsens, access to credit for some high-risk borrowers will significantly tighten.
The implication is that things are stable for now, but don’t be too optimistic. The top ten perpetual commercial development firms control about 80% of private credit assets, with very high concentration. If these few firms come under pressure simultaneously, the entire system’s fragility will be exposed.
5. Inflation’s Rank Drops, but Probability Rises
Persistent inflation, favored by 45%, ranks fifth. This is 2 percentage points higher than last fall’s 43%, but its ranking has dropped from third.
It sounds contradictory—why does concern increase while the rank drops?
The reason is simple: other risks are rising too quickly. Geopolitical risks, oil prices, AI—these new variables are heating up rapidly, drawing more attention.
This doesn’t mean inflation risk has disappeared. The report explicitly warns that rising interest rates combined with persistent inflation will produce significant financial and economic shocks. But in the Fed’s current priority list, these new threats are more urgent.
6. Hedge Fund Leverage Is a Time Bomb
According to the Fed’s April 2025 report, hedge funds hold about $12.5 trillion in assets, with an average leverage ratio of about 9 times (total nominal exposure/net assets), and the top fifteen funds have total leverage of 12-13 times.
This is the highest level since the establishment of the Form PF reporting system in 2013.
These highly leveraged funds are major buyers in the U.S. Treasury market. If the Treasury market experiences a correction, they may be forced to liquidate positions to cut losses, triggering chain reactions. The Fed has already pointed out in previous reports that current hedge fund leverage statistics may underestimate actual risks.
Summary
The Fed’s release of the five major risk frameworks for the next 12 to 18 months is ultimately a game of attention allocation.
Old risks haven’t disappeared, and new risks are emerging. Geopolitical tensions, oil, AI, private credit, and inflation—all require policymakers to devote significant effort. But regulatory resources are limited, and prioritization determines who gets attention.
From the trend in this report, market attention is subtly shifting: inflation has been partly accepted as the new normal, AI has moved from the fringe into the mainstream narrative, and oil shocks have jumped directly into the top two risks. This shift not only reflects real-time risk assessment but also signals the core logic of future capital flows and asset pricing.