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Federal Reserve “would be absolutely prepared” to establish its fire power to stabilize financial markets if conditions become disordered, according to one of the senior Central Bank officials.
Susan Collins, Boston Fed’s leader, said “markets are still working well” and that “we are not looking at liquidity concerns in general.” But she said the Central Bank “has means to address concerns about market function or liquidity if they are born.”
“We had to decide quite quickly, various tools,” she told the Financial Times, referring to past interventions to address chaotic conditions in the markets. “We would be absolutely prepared to do it as needed.”
Collins’ remarks come in the middle of a week of intense unrest in US markets after President Donald Trump launched a global trade war, causing fear of recession. The sale that began in Wall Street reserves last week has now cascaded the $ 29 treasury market, which sits in the heart of the global financial system.
Boston Fed chief spoke to FT as another senior US Central Bank official, John Williams of New York Fed, warned that Trump’s tariffs could send significantly higher inflation, push unemployment and significantly weaken the country’s economic growth.
Boston Fed President is also expected that inflation could be over 3 percent this year. She said the emergency rate cuts would not be the main means of responding to any deterioration in market function.
“The essential tool of interest rate we use for monetary policy is, of course, not the only tool in the tool and perhaps not the best way to address the challenges of liquidity or market functioning“ She said.
The 10-year Treasury yield, a reference point for trillions of dollars in assets worldwide, has jumped 0.5 percentage points to 4.5 percent over the past week, a major action for a wealth that usually trades with low rise.
Banks and investors of Wall Street have said that liquidity, or the ease in which traders can buy and sell without moving prices, has deteriorated as instability has chosen in the treasury market.
Jay Barry, a fixed -income strategist of JPMORGAN, said Friday, “liquidity is bad because instability is high. The movements are very high, but market functioning is okay.”
He added that the sale in the treasures was “regular” so far.
Collins said any intervention by the Fed will depend on “what conditions we are seeing”.
The Central Bank intervened during a period of major market dysfunction during the Coronavirus crisis in 2020, when critical funding markets captured while investors were caught up in fear of how the pandemia would affect the global economy.
The Fed opened by restoring the programs of the financial crisis era that function as a valve for releasing pressure on borrowing markets, while also unparalleled corporate debt purchase. The Central Bank also lowered the rates on the ready-zero and removed its lid on the amount of treasures it could buy as part of its interventions in 2020.
Collins said on Friday that the Fed has “additional residence facilities that can help to support market function that are already in place”.
