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The Federal Reserve warned of several new risks to the U.S. financial system in its semi-annual financial stability report, released late Monday – including market volatility from meme stocks and a potential spill over from China’s real estate troubles.

Important facts

Concerns about higher inflation and tighter monetary policy have risen since the beginning of this year and are now the main concern of investors, with around 70% of experts polled by the Fed citing this as the main risk to financial stability.

The second top concern – at over 50% of respondents – was vaccine-resistant variants of Covid-19, derailing the economic recovery, although it has declined slightly since May when the Fed last released its financial stability report.

At the same time, the Federal Reserve has also identified several new types of potential risk to the financial system that deserve attention and have emerged as major investor concerns of late, including growing interest in “meme stocks”.

A large group of younger retail investors have invested heavily in meme stocks and cryptocurrencies, spurred on by zero-cost brokerage and discussions on social media, a trend that could lead to future volatility in stock markets, the Fed pointed out.

Another major risk – now the third top concern for investors according to the Fed – is China’s regulatory crackdown, and particularly problems in its real estate sector that could spill over into US markets.

Real estate development giant China Evergrande has been trying to avoid defaulting since this summer, which did more damage to Chinese property stocks and raised investor concerns about the world’s second largest economy.