By Rich Miller and Jana Randow | Bloomberg

The International Monetary Fund has warned of the risk of sudden and steep drops in global stock prices and home values ​​as the Federal Reserve and other central banks withdraw the support they have provided during the pandemic.

The ultra-relaxed monetary policy has led to “pockets of market exuberance and growing financial leverage” that could unfold haphazardly and put economic recovery at risk as credit tightens, IMF said on Tuesday in its semi-annual report on financial stability.

“The shocks could come from the central banks themselves as they are tightening faster than expected,” Tobias Adrian, director of the IMF’s monetary and capital markets department, said in an interview. “We are concerned that we may see a massive sell-off of considerable magnitude, given the level of strained valuations.”

To complicate the calculation of central banks, he said, the emergence of inflationary pressures “unlike anything we have seen before”.

While the IMF agrees with the Fed and other central banks that the explosion in inflation is likely to be temporary, “there is quite a bit of uncertainty” around this forecast, Adrian said. This raises “some question marks” about how policymakers would react to a financial market meltdown.

Here are some of the risks to financial stability highlighted in the IMF report:

Stock markets

“Equity price misalignments” are prevalent as the surge over the past 18 months has left stocks elevated relative to economic fundamentals.

Prices could fall “significantly in the event of a sudden reassessment of the economic outlook or unexpected policy changes.”

Housing markets

“The risks of falling house prices seem significant. In the worst-case scenario, the fall in house prices over the next three years is estimated to be around 14% in advanced economies and 22% in emerging markets.

One positive point: While home values ​​appear to be as tight as they were before the 2007-08 financial crisis, the banking system is in much better shape than it was then. depending on the Fund.

Crypto-currencies

Although the crypto-asset market has multiplied to over $ 2 trillion, it remains weak relative to global stock and bond markets and does not yet pose a risk to the overall stability of the global financial system.

But regulation is urgently needed, especially stable coins, to mitigate such dangers in the future. “With limited or inadequate disclosure and oversight, the crypto ecosystem is exposed to consumer fraud and market integrity risks,” the IMF said.