© Reuters. FILE PHOTO: Lorie Logan, President and CEO of the Federal Reserve Bank of Dallas, attends a dinner program at Grand Teton National Park where financial leaders from around the world gather for the Jackson Hole Economic Symposium in outside of Jackson, Wy.
By Michael S. Derby
NEW YORK (Reuters) – Federal Reserve Bank of Dallas President Lorie Logan said on Friday that the U.S. government bond market remains vulnerable to significant shocks and that government officials should push for the creation of a more formal system to help the market in times of trouble.
“The US financial system has become increasingly vulnerable to core market dysfunction because trading supply has not kept pace with demand as the size and complexity of the Treasury market has grown.” , Logan said in the text of a speech he will deliver at an event held. from the University of Chicago Booth School of Business.
He pointed to a rapid expansion of US government debt and a shift in who buys and holds that debt, as well as the fade of the big banks that once dominated the government bond market, as helping to increase vulnerabilities. in the face of big shocks.
When a shock arrives that rises to the level where it could threaten the basic functioning of markets, it is appropriate for policymakers to take action, as they have in the past, Logan said. He pointed to the Fed’s intervention to borrow and then buy massive amounts of government debt at the start of the coronavirus pandemic three years ago as a key chapter in policymakers’ action to salvage a failing market.
Logan, who has voting rights at this year’s Federal Open Market Committee monetary policy meetings, did not comment on the outlook for monetary policy and the economy in his prepared remarks.
Before joining the Dallas Fed last year as its leader, Logan was a key official at the New York Fed in the design and implementation of the FOMC’s monetary policy directives. He spoke amid ongoing concerns about how financial markets, particularly the sector that trades US government debt, will respond to the next chapter of stress.
Those anxieties have been heightened by the Fed’s aggressive pace of rate hikes to offset very high levels of inflation. Those increases, along with the Fed’s ongoing efforts to dump bonds to reduce their footprint in the market, have raised questions about what policymakers could do to support markets going forward. A paper this week from the New York Federal Reserve said the official sector should move toward seeking a more formalized approach to providing support.
“Central banks should rarely intervene to support the functioning of central markets, but when such interventions are needed they need to be effective,” Logan said, adding in practical terms that interventions such as bond purchases can help in some way. one way but then cause problems on other fronts.
Logan said policymakers are continuing to work on methods to formalize how they might intervene and shore up underlying market strength. He said it was critical that any effort be clearly communicated and understood, and if the Fed needs to buy bonds to prop up the market, that it be clearly marked as a support operation and not for monetary policy purposes.
“The public and private sectors need to work together to improve the resilience of the market so that these episodes will be much less frequent in the future,” Logan said. Policymakers must also “be prepared for those rare occasions when extreme stresses in central markets threaten financial stability or the macroeconomy” and “central banks must continue to develop the toolkit to mitigate dysfunction.”