On Tuesday, September 29, New York Fed President John Williams spoke at the U.S. Treasury Market Conference about the importance of well-functioning financial markets and how the Fed has responded to recent episodes of volatility.
“[I]f another crisis were to occur, we must to be able to look back on this time and know that we learned everything we could from recent events.”
“We need to understand how changes in the market ecosystem — whether due to regulation, technology, or other factors — have influenced market resilience.”
“The events of the past year have demonstrated the critical role central banks can and must play in extraordinary times when market stress and dysfunction threaten to spill over into the economy.”
In his speech, President Williams discussed the Treasury market, the repo market, and the mortgage-backed securities market, describing them as “the heart of the circulatory system of our financial system and our economy.” He said: “When they are working smoothly, all the other parts of the system can perform as they should. But, the opposite is true as well. If these critical markets break down, credit stops flowing, and people can’t finance the purchase of a car or a home, businesses can’t invest, and the economy suffers, resulting in lost jobs and income.”
President Williams described periods of volatility in financial markets in September 2019, and earlier this year. Discussing the disruption of March 2020, at the onset of the pandemic, he said: “Measures of market functioning deteriorated to levels near, or in some cases worse than, those we saw at the peak of the 2008 global financial crisis.” He said, “In response to the extraordinary volatility and signs of market disruption caused by the pandemic, the Federal Reserve greatly expanded its repo operations and decisively and immediately began purchasing enormous quantities of U.S. Treasury securities and agency mortgage-backed securities.”
He stressed the importance of learning from recent events. He said: “We need to understand how changes in the market ecosystem — whether due to regulation, technology, or other factors — have influenced market resilience.” President Williams concluded with the reminder that “Liquid, well-functioning markets for Treasury and related securities are absolutely essential for credit to flow and the economy to prosper.”
This article was originally published by the New York Fed on Medium.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.