Concerns about financial market stability, including the risk of a sharp decline in asset prices, are becoming a new theme in Federal Reserve officials' discussions about the timing of interest rate cuts, and even whether to cut at all.

In a speech at Georgetown University on Thursday, Federal Reserve Governor Lisa Cook did not specifically comment on recent interest rate policy.

But she listed a series of financial system risks, including the rapidly growing private credit market, hedge fund trading in the Treasury market, and the application of generative AI in machine trading.

Cook also hinted that she would not be surprised by a crash in asset prices at historical highs — these high-valuation assets support overall consumer spending and the broader US economy — although such a decline does not in itself imply financial market instability. "Right now, my sense is that the probability of a large drop in asset prices has increased."

On another occasion earlier, Cleveland Fed President Beth Hammack reiterated her opposition to further rate cuts because inflation remains too high, and said she views loose financial conditions as another reason to oppose cuts.

While rate cuts might be seen as "buying insurance" for the job market, she said, "we should remember that this insurance may come at the cost of increased financial stability risks."

Like Cook, she said she believes the financial system is in good shape, with well-capitalized banks and robust household balance sheets. But like Cook, Hammack also said she is watching the high leverage levels of hedge funds and believes private credit warrants attention.

Their remarks echo the broader concerns among Fed policymakers, as highlighted in the Fed's October meeting minutes released on Wednesday.

"Some participants commented on elevated valuations of assets in financial markets, with several of them highlighting the possibility of a disorderly decline in equity prices, particularly if markets were to suddenly reassess the prospects for AI-related technologies," the minutes said.

The debate among policymakers has largely centered on whether another cut would push inflation, which has been above the Fed's 2% target for years, further in the wrong direction, or whether the more pressing concern is a weakening labor market requiring further Fed easing.

On Thursday, two Fed officials seen as holding hawkish views again expressed unease about inflation.

Fed Governor Michael Barr said on Thursday that the Fed needs to be cautious when considering further rate cuts.

"I'm concerned that the inflation rate we're seeing is still around 3%, and our target is 2%, and we're committed to getting to 2%," Barr said. "So we need to be careful right now about monetary policy because we want to make sure that we achieve both sides of our dual mandate."

Barr did not declare opposition to another rate cut, but his unease about stalled inflation will complicate the task for Fed Chair Jerome Powell, who is trying to build consensus among divided policymakers ahead of the December 9-10 Washington meeting.

Barr supported the Fed's September and October rate cuts but has so far not signaled his position for December. His vote could be crucial, as several of his colleagues have already publicly stated their support for or opposition to a third consecutive cut, making the outcome highly uncertain.

In another event in Indianapolis, Chicago Fed President Austan Goolsbee said he remains worried about another cut in December.

Inflation progress "seems to have stalled, and if anything, received a warning in the wrong direction," Goolsbee said. "That makes me a little bit nervous."

After a prolonged government shutdown, the Fed finally received new official employment data, but so far, this data has not largely resolved the differences among policymakers. The September jobs report released by the Bureau of Labor Statistics on Thursday painted a mixed picture: employers added 119,000 jobs — the best figure since April — but August data was revised downward, and the unemployment rate edged up to 4.4%.

Following the data release, Barr said he believes the labor market is "softening somewhat," with job creation near the so-called "breakeven" level that keeps the unemployment rate stable.

Hammack, however, called the September jobs data "stale" and reiterated her opposition to additional cuts. "Cutting rates to support the job market risks prolonging the period of high inflation and could also encourage risk-taking in financial markets. That means when the next recession comes, it could be larger than it otherwise would be and have a bigger impact on the economy," she said.

After the data release, traders stuck to their prior expectations: barring data showing a decisive breakdown in the job market, the Fed is likely to skip a cut in December and then cut by 25 basis points in January. The BLS will not release another comprehensive employment situation report until the week after the Fed's December meeting.