Randal K. Quarles, the Federal Reserve’s vice chair for supervision, said on Thursday that the Fed and other regulators needed to look into what could be done to insulate the Treasury market after broad market turmoil in March caused it to jam up.
“We have to ask: What can be done to improve Treasury market functioning over the longer term so that this market can withstand a large shock to demand or supply?” Mr. Quarles said in remarks prepared for delivery to the Institute of International Finance.
In March, a mismatch between Treasury buyers and sellers amid widespread financial stress prompted the Fed to jump into the market, buying huge quantities of bonds and taking other measures to soothe conditions.
The Treasury market may have grown so large — swelled by debt issuance to fund America’s spending — that it has outpaced its ability to cope with periods of stress without help, Mr. Quarles, an expert on financial markets and the top regulatory official at the Fed, said during a question-and-answer session on Wednesday. It could be that “the sheer volume there may have outpaced the ability of the private market infrastructure to support stress of any sort there,” Mr. Quarles said.
That would be a major issue for financial regulators and financial market participants alike. The Treasury market is among the deepest and most liquid in the world — meaning that money invested in U.S. government bonds is expected to change hands easily and with little risk. Treasuries are used as the backbone for many other markets.
It also raised the prospect that the Fed might need to remain active in the market permanently, something that Mr. Quarles said on Wednesday that he had not yet concluded. The mere fact that he raised it, though, is a substantial statement. Just a decade ago, critics regularly blasted the Fed for large-scale Treasury purchases.
Mr. Quarles also highlighted on Thursday that short-term funding markets, including ones closely interlinked with Treasury markets, experienced widespread strain in March. “It is worth asking whether there may be other steps needed to secure these very important sources of liquidity,” he said.
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