Although progress has been made in recent months with vaccinations, the near-term risks associated with the COVID-19 pandemic remain relatively high, the Federal Reserve said in its semiannual Financial Stability Report released Thursday.
Outside the U.S., the pandemic's worsening could stress the financial system in emerging markets and some European countries, according to the central bank.
Also, asset prices "may be vulnerable to significant declines should investor risk appetite fall, progress on containing the virus disappoint, or the recovery stall," the Fed said. "Some segments of the economy — such as energy, travel, and hospitality — are particularly sensitive to pandemic-related developments."
Valuations in a range of asset classes have continued to rise from levels that were already elevated late last year, said Lael Brainard, a member of the Federal Reserve's board of governors, in a statement. "Equity indices are setting new highs, equity prices relative to forecasts of earnings are near the top of their historical distribution, and the appetite for risk has increased broadly, as the 'meme stock' episode demonstrated," she said.