(Reuters) – High inflation, volatile stock and commodity market markets, and war in Ukraine are the main risks facing the U.S. financial sector, according to the Federal Reserve in a biannual update regarding financial stability. The Federal Reserve warned Monday of a system at risk for “sudden disruption.”

According to the report, U.S. Treasury yields have risen rapidly and war-related troubles in oil markets, among other factors, this has already caused stress in parts of the financial sector. Although the stress is not as severe as some previous episodes, it does raise the possibility of significant and sudden deterioration.

“It is notable that households and business have decreased their borrowing percentage as a percent of gross domestic production and currently seem to have the resources to cover our debt burdens,” Lael brainard, Fed governor and vice-chair-designate, said in a statement attached to the report.

This report is the first that identifies the changes in financial environment since last autumn. It includes a faster tightening by the Fed, rising interest rates overall, persistent inflation, and Russia’s invasion.

Volatility has been evident in U.S. stock market that dropped steeply over the past week, as well in U.S. bond markets that adjusted to lower U.S. rates of interest and more difficult financial conditions in part Fed’s effort to slow down inflation.

The report stated that “Inflation was higher than anticipated, more persistent, even prior to the invasion of Ukraine” and added that uncertainty about the future inflation outlook could pose risks for financial conditions as well as economic activity.

The report stated that financial markets had experienced volatility over the past six months and put some pressure on liquidity. Over the course of this period, Treasury yields rose markedly while broad equity prices fell notably and credit spreads in corporate bond markets increased significantly.

After closing at record levels on its first trading day in 2022, benchmark Index fell 16.5%. The Index also lost more than half of its value over the past six months, having fallen to less than one quarter of its original value. The yields of the 10-year Treasury Note, which is important for a variety of business and consumer financing costs has nearly doubled in the past year.

According to a survey by economists and other market participants, the main risks for the U.S. financial sector were outweighed by the absence of pandemic threats and the emergence of a geopolitical uncertainty.

The report stated that survey respondents are concerned about the possibility that stressors in Europe due to Russia’s invasion of Ukraine and in emerging markets (such as China or driven by inflationary pressures) could reach the United States. Additionally, rising interest rates and inflation in the United States may have a negative impact on domestic economic activity and asset prices as well as credit quality and other financial conditions.

The overall corporate balance sheet is healthy with sufficient cash flow to pay interest payments. However, it said that the impact of rising interest rates and supply chain disruptions on corporate profitability was uncertain. Unexpectedly high interest rates or a significant drop in profitability could affect the ability to service debt.

“Moreover, the rising pressure on oil prices could impede the recovery of hard-hit sectors such as the airlines.