"Further adverse surprises in inflation and interest rates, particularly if accompanied by a decline in economic activity, could negatively affect the financial system,” the bank said.
For individuals, inflation could cause job losses as the Fed increases interest rates, which could also impact the housing market through higher mortgage rates, the bank said.
Because the report reflects the Fed's thinking, its conclusions could be part of the backdrop when the central bank conducts its annual stress tests of the nation's biggest banks in the coming weeks. The Fed used previous reports to highlight the pandemic as well as last year's interest in "meme" stocks such as GameStop and AMC Entertainment.
In a statement, Fed Governor Lael Brainard also cited the recent volatility in the commodity markets as a place of potential risk. While gyrations in the energy market have made headlines for several weeks now, there have been other commodity markets — particularly those for industrial metals like nickel, zinc and lithium — that have seen large fluctuations.
“The Federal Reserve is working with domestic and international regulators to better understand the exposures of commodity market participants and their linkages with the core financial system,” she said.