The people who oversee the U.S. dollar and help the government set interest rates are wondering about some of life insurers' assets.
Federal Reserve System staff members told members of the Federal Open Market Committee last month that "life insurers' allocation of assets toward private credit and risky assets, funded in part by nontraditional liabilities with short maturities, continued to grow," according to a copy of FOMC minutes posted Wednesday.
The Federal Reserve staff described insurers' growing use of private credit assets as a notable example of financial system vulnerabilities.
The minutes record what committee members did during a two-day meeting that started July 29. Members ultimately voted 9-2 to hold interest rates steady, rather than lowering rates, because of conflicting concerns about a weakening job market and rising prices.
FOMC members talked about life insurers' use of "illiquid assets" in November 2024, but the July meeting appears to be the first where Fed members or Fed staffers referred specifically to life insurers' use of private credit assets.
What it means: The Fed thinks life insurers' use of investments in assets related to private credit arrangements may need more attention.
Although this is the first time the Fed has mentioned life insurers' use of private credit assets in its open market committee meeting minutes, the Fed staff told FOMC members in November 2024 that "life insurers' greater reliance on nontraditional liabilities suggested that adverse shocks to the industry could trigger substantial funding pressures at these firms."
Private credit: Private credit arrangements create ways for investors to invest in loans to small and midsize businesses, and to invest in other types of loans made outside traditional banking channels and outside large organizations' efforts to borrow money by issuing bonds registered for sale to the public with the U.S. Securities and Exchange Commission.
After federal regulators put more restrictions on banks' lending capacity, in response to concerns about the 2007-2009 Great Financial Crisis, banks cut down on lending to businesses, and businesses began to get more of their capital through private credit arrangements.
Critics argue that private credit assets can be complicated and opaque.
Defenders says the assets often have credit ratings from established rating firms and now connect investors with a much bigger, more diverse group of borrowers than investment-grade corporate bonds and other public credit arrangements do.
Insurers' assets: The Federal Reserve Board and other world central bankers pushed interest rates lower after the financial crisis in an effort to nurse home borrowers and other struggling borrowers back to health.
Traditionally, U.S. insurers have invested heavily in bonds issued by public companies with high credit ratings.
After interest rates on new bonds fell close to 0%, insurers began to invest more of their portfolios in real estate, mortgage-backed securities and private credit in an effort to increase investment yields.
At the end of 2023, insurers had about $800 billion of their $8.7 trillion in assets invested in private credit arrangements and other arrangements classified by insurance regulators as alternative assets.
The Federal Open Market Committee: The FOMC consists of seven members of the Federal Reserve System's board of governors, the president of the Federal Reserve Bank of New York and four presidents of other Federal Reserve banks.
It oversees "open market operations," or efforts by the Federal Reserve System to keep the U.S. monetary system and the U.S. economy running smoothly.
Fed members and U.S. economists generally believe that lower interest rates help the job market but increase inflation.
The FOMC traditionally posts its meeting minutes three weeks after it holds its rate-setting meetings.
The Federal Reserve Building. Credit: Shutterstock
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