WASHINGTON (Reuters] – Market participants have given up on the COVID-19 pandemic to focus their attention on higher inflation, tighter monetary policy, and other concerns.

The semiannual report noted, at the same time that the use of stablecoins was increasing and so-called “meme stocks”, as concerns which merit attention and present new risks for the financial system.

A little over 70% of the market participants polled by the Fed cited inflation and tighter Fed policies as their main concern for the next 12-18 months. This was ahead of the vaccine-resistant COVID-19 variants, and potential Chinese regulatory crackdowns.

The Fed warned that the United States’ risk appetite is still high, but conditions can change rapidly if the economy recovers or the pandemic gets worse.

The report said that fiscal and monetary policy accommodations, in addition to continued progress on vaccines, supported a strong economic recovery. “Despite its human tragedy, the Delta-variant has made a small impact on U.S. markets”

According to the Fed, vulnerabilities were decreasing in both households and businesses due in part, in part, to low interest rates. The overall increase in home prices was not accompanied by any erosion of underwriting standards, or speculation.

The Fed observed that although overall bank credit quality has improved over the past six months, delinquency rates among commercial real estate borrowers as well as other sectors impacted by this pandemic are still high. Hedging funds as well as life insurance companies continue to have high levels of leverage, the Fed stated.

However, the Fed identified concerns, including uncertainty about the outcome of the pandemic, the degree of government support and the anticipated economic recovery.

According to the report, “Uncertainty regarding the path of pandemics and expiration of relief programmes may pose substantial risks to household balances.”

“MEME” STOCKS

First, the Fed dedicated a section to its report to explore rapid and social media-driven volatility of stocks like GameStop, AMC Entertainment, Holdings Inc.

Although wild swings and “meme stock” crazes may have limited effect on financial stability, Fed officials did warn of potential problems. One, these younger investors tend to be more reliant on leverage than the average investor, making them susceptible to price swings large.

Also, while there is a rise in risk appetite, social media interaction can make it difficult for investors to anticipate. Risk management systems within financial institutions might not be adequate to handle this high-risk approach.

The report stated that a rapid retreat in risk appetite by retail investors could lead to a potentially unstable outcome.

Fed highlighted “stablecoins”, which are digital currencies that have a value tied to the U.S. dollars. Regulators are concerned about the rapid adoption of these products, as they fear that there could be runs or lack of oversight.