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Irrational exuberance? Rising commercial real estate prices could signal warning for economy: Fed Reserve

Jerome Powell (Credit: Getty Images)

Ever-rising commercial real estate prices nationwide could be a risk to the stability of the U.S. financial markets, as they were in the last recession.

That was the assessment from the Federal Reserve in its inaugural financial stability report on Wednesday. Fed officials cited commercial real estate — in which purchase prices continue to outpace rent increases — as well as nonfinancial corporate borrowing as risks in its report, according to the Wall Street Journal.

Separately, some Fed officials have pointed out that the past two recessions were caused not by inflation, but by asset bubbles, such as real estate, which can be more difficult problems to solve.

The report is a result of efforts by former Fed Chairman Ben Bernanke to monitor weak links in the financial system following the crisis. Now, it comes at a time when market indicators show that economic growth is waning nationwide, as interest rates rise, according to the Journal.

It also raises less concern about risks stemming from household borrowing and in the banking sector. It said the chance that banks would misprice one asset such as real estate is low, according to the Journal.

The banking sector was well capitalized based on the report, though officials did express concern about the signs of increased borrowing at nonbank financial firms including hedge funds. This could be risky because nonbank lenders are increasingly making up a bigger share of the real estate lending landscape.

Fed Chairman Jerome Powell was expected to be in New York on Wednesday to speak about monetary policy and financial stability. [WSJ] — Keith Larsen

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