The Federal Reserve warned about financial stability risks emanating from frothy stocks and debt-laden hedge fund bets in its twice-annual report on potential vulnerabilities in the system, pointing to the rise of so-called meme stocks as one sign that risk-taking could be getting out of hand.
The central bank’s Financial Stability Report, released Thursday, followed an unusual six months for markets. Over that period, stocks climbed steadily as the U.S. economic outlook rebounded, and stories of excess began to crop up.
Internet discussion boards helped fuel interest in stocks such as GameStop, a cryptocurrency created as a joke has run up in value, and a little-known hedge fund melted down, stories that have captured headlines and caused many — including, evidently, some at the Fed — to ask whether the financial system was headed for problems.
“Vulnerabilities associated with elevated risk appetite are rising,” Lael Brainard, a Fed governor,…