Federal Reserve Minutes Warn of Financial Vulnerabilities, with Asset Valuation Pressures and Corporate Debt in Focus

The minutes of the Federal Reserve's July monetary policy meeting indicated that the U.S. financial system still faces "significant" vulnerabilities, with the main risks concentrated in the areas of overvalued assets and corporate debt pressures.

Although the household sector remains in a strong financial position (the household debt-to-GDP ratio is at a 20-year low), signs of a bubble in the capital market contrast sharply with concerns about the real economy.

Asset valuation pressures have become a significant risk in the financial market. In the stock market, the S&P 500's price-to-earnings ratio is at a historically low level, and its earnings yield is only 3.7%, even lower than the risk-free rate of 4.22% on three-month U.S. Treasury bills, resulting in a significant yield inversion.

In the bond market, high-yield corporate bond spreads have narrowed to historic lows, significantly underestimating default risk. In the commercial real estate sector in particular, the default rate for CMBS office properties has reached 11.1%, exceeding the level during the 2008 financial crisis, highlighting the sector's extreme vulnerability.

Corporate debt risks also remain elevated. In the first seven months of 2025, 446 large corporate bankruptcy filings were filed in the United States, a 12% increase compared to the pandemic period. The number of bankruptcies in the industrial and consumer goods sectors reached a 15-year high, and the default rate on high-yield bonds rose to 5.8% in the first half of the year.

Regional banks were also under pressure, with the default rate on commercial real estate loans climbing to a decade-high of 4.65%. Banks held approximately 44% of maturing debt, resulting in an estimated potential capital shortfall of $413.2 billion.

The minutes also revealed deepening divisions within the Federal Reserve. In a rare move, Governors Waller and Bowman both supported the decision to cut interest rates, a first since 1993. Officials also expressed significant disagreement over the impact of tariffs, with some emphasizing inflation risks and others warning that the labor market was "on the brink."

#美联储会议 The minutes noted that current systemic risks are primarily driven by overvalued assets and lax regulatory policies. Lowering interest rates could further fuel asset bubbles, while higher interest rates could exacerbate corporate debt crises.

With the #杰克逊霍尔 annual meeting approaching, the market is eagerly looking forward to Federal Reserve Chairman Powell's speech on Friday. Investors are eager to obtain clear monetary policy signals from the central bank's statement in order to judge the future policy direction and its potential impact on financial markets.