On November 20, Fed Governor Lisa Cook spoke on four main areas of concern in the financial system: asset valuations; the shift in lending practices away from bank loans and toward private credit arrangements; the growing role of hedge funds as investors in the U.S. Treasury market; and the use of generative AI in financial market trading. Cook noted that while the financial system remains resilient, there were still vulnerabilities that warranted attention.

Cook explained that asset valuations are not assessed by their actual levels, but by comparing them to underlying fundamentals and historical benchmarks. She observed that asset values in equity, corporate bond, leveraged loan, and housing markets are elevated, which could increase the likelihood of outsized price declines.

Additionally, the rapid growth of private credit — loans to privately held businesses from nonbank entities — had increased credit access but also introduced more complexity and interconnections with leveraged financial entities, raising the risk that unexpected losses could spread through the system. The Fed also expressed concern about the growing footprint of hedge funds in the U.S. Treasury market, which could amplify market instability if large positions are unwound during periods of stress.

On generative AI, Cook noted how the use of generative AI in trading could both stabilize and destabilize prices. While electronic trading platforms are adopting advanced machine learning techniques to detect market manipulation and collusive behavior, Cook acknowledged ongoing debate about whether generative AI may increase market concentration due to high investment barriers.