Israel has been conducting a relentless bombing campaign on the Gaza Strip since, October 7, killing more than 4,100 Palestinians and injuring at least 12,000.

Ongoing exchanges of fire with Hezbollah militants along Israel's northern border with Lebanon have raised fears that the conflict could spread to other countries in the region.

"The attack on Israel, in conjunction with Russia's ongoing war against Ukraine, has ratcheted up geopolitical tensions," the Fed said in its semi-annual report on financial stability.

"Escalation of these conflicts or a worsening in other geopolitical tensions could reduce economic activity and boost inflation worldwide," it added.

Mitigating banking stress
 

In its report, the Fed also said that policy interventions earlier this year in light of the rapid collapse of Silicon Valley Bank (SVB) had "played a key role in mitigating the stresses in the banking system that emerged in March."

SVB failed following a bank run by investors concerned by its exposure to interest rate risk in light of the Fed's aggressive campaign of rate hikes.

A number of other US banks collapsed in the turmoil that followed, which also led to the merger, under pressure, of the Swiss banking giant Credit Suisse with regional rival UBS.

"Since March, volatility has abated and deposit outflows have largely stabilized," for affected banks, the Fed said.

"But these banks nonetheless continued to face challenges navigating changes in depositor behavior, higher funding costs, and reduced market values for investment securities," it added.