Fed warns of meme-pumping social media ‘echo chambers’

Stocks (often called meme stocks) that have experienced massive volatility as a result of social media attention have so far not threatened broader financial stability, but could open the door to vulnerabilities, the Federal Reserve said in a new report.

The Fed’s biannual update on America’s financial system included a special section on the meme stock phenomenon. attributed to his disposition, Attention on Twitter, Reddit and other platforms As young people enter the retail business market, it encourages rapid entry into mobile stocks, new trading technologies including mobile apps, and changing demographics.

“With an increase in risk appetite and a growing share of young retail investors, access to retail stock trading opportunities has expanded over the past decade,” the report said.

Social media can increase interest in stocks and at the same time create an echo chamber where “investors find themselves most often communicating with others with similar interests and views, thus reinforcing their views even if those views are speculative or biased. ”

Still, according to the Fed’s report, internet-inspired piles don’t necessarily create conditions that would encourage a broad market crash.

“To date, the effects of changes in retail equity investor characteristics and behavior on broad financial stability have been limited,” the Fed said. The central bank specifically evaluated what was happening Shares of AMC Entertainment and GameStop He noted that the activity and volatility in these stocks in January came alongside the high activity on Twitter.

While the report concluded that “recent periods of breast stock volatility have not left a lasting mark on broader markets,” the Fed said several trends “must be watched.”

The report noted that young and debt-laden investors may be more vulnerable to stock price fluctuations, especially as they currently use “options” that allow traders to bet on whether prices will rise and can increase leverage and potential. casualties.

The Fed also warned that “periods of high risk appetite may continue to evolve with interaction between social media and retail investors and may be difficult to predict” and that financial firms may not have calibrated their risk management systems to reflect volatility. losses that nozzle stock segments can trigger.

“Periods of higher volatility may require more steps to maintain the resilience of the financial system,” he said.

Looking at a wider range of asset classes and recent trading activity, the Fed’s analysis of financial stability suggested that overall, vulnerabilities were moderate compared to pre-pandemic – but pointed to higher asset prices and a range of ongoing risks.

The report said stock prices have “increased significantly” and, according to projected earnings, prices remain near historic highs. He noted that home prices have risen, but mortgage lending standards have not deteriorated too badly. When lenders start lowering their standards, this can make the market more vulnerable.

The Fed noted that “corporate bond issuance, backed by low interest rates, remains robust” and also noted that “across the rating spectrum, the composition of newly issued corporate bonds has become riskier.”

And while many markets are showing signs of investor optimism, some persistent financial pressures from the pandemic shock remain.

Some commercial real estate sectors continue to face challenges as “office vacancies increase and hotel occupancy rates remain low,” the report said. Also, “structural vulnerabilities remain in some types of money market funds” that could amplify a shock to the system.

Money market mutual funds melted During the pandemic and the second time in a dozen years it’s required a Fed bailout, regulators are now looking at how to reform them to make them more resilient.

The report also warned that life insurers may have a hard time raising a pinch of cash.

And researched climate risks. The central bank is among regulators trying to understand what risks climate change might pose to banks, insurers and the wider financial system.

“The Federal Reserve is developing a climate-related scenario analysis program,” the report said. “The Federal Reserve considers an effective scenario analysis program designed to look forward years or decades apart from the current regulatory stress testing regime.”

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