John C Williams:  Preparing for the unknown
Central bank: fed | Type: speech | Date: 2021-11-17

## John C Williams: Preparing for the unknownRemarks (via videoconference) by Mr John C Williams, President and Chief Executive Officer of the

Federal

Reserve

Bank

of

New

Y ork,

at

the

2021

US

Treasury

Market

Conference,

17 November 2021.*

*

*

## As prepared for delivery

## IntroductionGood morning, and welcome to the seventh annual U.S. Treasury Market Conference.

This is our second time gathering virtually.

Although I miss seeing all of you in person here at the New Y ork Fed, I am pleased that so many of you could join us today.This conference is a great opportunity for market participants, as well as members of five publicsector bodies-the Treasury, the Board of Governors, the SEC, the CFTC, and the New York Fed-to come together and take stock of the U.S. Treasury market.

The events of the past 20 months

have

further

underscored

this

market's

significance

in

the

global

economy-and

the important role our five entities perform in ensuring that it functions as it should.In fact, the Inter-Agency Working Group for Treasury Market Surveillance (IAWG) came together to examine recent, notable disruptions to the Treasury market, and it issued a report ahead of this

conference

that

identifies

steps

to

strengthen

its

functioning

and

resilience.

I

won't

have time to go over the report in detail, but I strongly encourage everyone to read it. 1Severe disruptions to critical financial markets like we saw last spring should be rare.

But just as a town ravaged by flooding will seek to rebuild in ways that help it withstand the next big storm, so, too, must we think about how to shore up the Treasury market so it can better endure the next big shock.Today, I'm going to touch on the notable market disruptions that have taken place over the past decade.

Then, I'll discuss the imperative of a resilient Treasury market.

I'll close by challenging all of us to come together to prepare for the future.As always, before I continue, I must give the standard Fed disclaimer that the views I express here

today

are

mine

alone

and

do

not

necessarily

reflect

those

of

the

Federal

Open

Market Committee or others in the Federal Reserve System.

## Look Back to Prepare for the FutureA well-functioning U.S. Treasury market is critically important for our economy and, in fact, the entire world.

It enables the safe and stable flow of capital and credit to households, businesses, and governments.

It serves as a primary benchmark for pricing in other financial markets, both domestic

and

global.

Last, but definitely not least, it's vitally

important

for

the

effective transmission of monetary policy to the broader financial system and to the economy.Thankfully, most days-most years-the Treasury and related markets function incredibly well.

But in the past decade, these markets have experienced three abrupt and notable disruptions, each of increasing severity.

First was the so-called flash rally of October 2014; then, the repo market distress in September 2019; and third, the extraordinary dislocations at the onset of the COVID-19 pandemic in March of 2020.General George Patton once said, 'Prepare for the unknown by studying how others in the past have coped with the unforeseeable and unpredictable.' It's a good piece of advice-and one thatBIS central bankers' speechesshould guide our work on Treasury market reform.The IAWG report I mentioned earlier reviews these events, so I won't repeat them here.

However, two lessons are clear.

First, the unforeseeable and unpredictable will happen, and can result in significant

stresses

in

the

Treasury

and

related

markets

that

may

spread

to

broader

financial conditions.

Second, when disruptions have been sufficiently severe and persistent, the market has not been able to quickly self-correct without official-sector intervention.The severe disruptions to the Treasury and funding markets in March of last year illustrate these points.

The incipient breakdown in market functioning quickly spread to other segments of the U.S. and global financial markets, risking a broad-based pullback in the availability of credit that is essential for our economy.The speed and extent of the market disruption necessitated immediate and dramatic action, the scale of which was truly unprecedented.

At the New York Fed, we are used to talking in very large sums, but even for us, the figures were staggering.

We were offering overnight repos of up to $1 trillion, as well as substantial amounts of term repos of longer maturities.

The sizeable offerings were designed to meet the markets' needs and provide confidence that liquidity would be available.

At their peak in mid-March of 2020, our repo operations reached nearly $500 billion. 2But repos alone were not enough to restore smooth market functioning.

The FOMC also directed the

Open

Market

Trading

Desk

at

the

New

Y ork

Fed

to

engage

in

large-scale

purchases

of Treasury securities and agency mortgage-backed securities (MBS)

to support

smooth functioning of those markets.The pace and amount of asset purchases during this period was unmatched.

During the worst of the crisis last year, the Federal Reserve was purchasing more than $300 billion of Treasuries per week,

which

was

more

than

the

Treasury

purchases

in

the

entire

first

round

of

quantitative easing in response to the Global Financial Crisis.

And in the three months starting in the middle of March, the Federal Reserve purchased more than $2.3 trillion of Treasury and agency MBS combined.These actions, along with prompt fiscal measures enacted by Congress and emergency steps taken by the Federal Reserve and other government agencies, ultimately proved successful at restoring

functioning

in

the

Treasury

and

other

financial

markets.

Together,

these

measures averted what could have been a severe financial crisis that would have had devasting effects on the economy.

But they are also a stark reminder that these markets are not nearly as resilient as they should be.

## The Imperative of ResilienceAfter

studying

this

event

and

others,

the

IAWG

has

proposed

a

number of principles to guide public policy for Treasury market reform.

It has also established several workstreams to study aspects of the Treasury market and help us achieve our collective objectives of financing the government

efficiently,

supporting

the

broader

financial

system,

and

implementing

monetary policy. 3The IAWG's No. 1 principle and No. 1 workstream center around improving market resilience.

I think it's safe to say that strengthening resilience is at the top of everyone's Treasury reform list.Resilience is the imperative of all markets-and that is especially true in the Treasury market because of its central role in

the

financial

system.

The

adage

of

the

financial

markets

is

that Treasuries are safe havens, even in the most turbulent times.The Treasury market has been able to absorb many shocks through the years.

But as the world changes, the market, too, evolves.

The growth of electronic trading has transformed the mix ofBIS central bankers' speechesintermediaries and trading practices.

Firms now increasingly have access to multiple financial markets, and markets are increasingly interconnected.When the Treasury market breaks down, when trading is disrupted, or when interest rates move in ways that are not based on fundamentals, the ripple effects can be swift-and devastating to the flow of credit to businesses and households.What we've learned during crises is that when the flow of credit to the economy is at stake, we must act quickly and decisively.

This is not a choice.

If we don't act effectively, the repercussions on the

U.S. economy-and the global economy-are severe.

In each of the past two notable market dislocations, the dysfunctions arose swiftly, and we, too, acted quickly to take steps that were effective in restoring the functioning and confidence in markets.But each event exposed weaknesses.

Over time, weaknesses can erode confidence.

So now, the challenge before us is this: How do we strengthen the most important market in the world in a way that helps us avoid having to take dramatic steps to cure impairments during the middle of a future crisis?How do we prepare for what we can't foresee and can't predict?

## Think DifferentlyOne thing that is clear when examining the causes of these market disruptions is that they were not primarily driven by economic forces, but rather by a failure of the markets to function in the ways they were expected to do in response to those particular circumstances.These sharp market disruptions teach us important lessons.

A number of experts in this fieldincluding the IAWG-have been doing excellent work in identifying potential solutions to ensure that similar disruptions don't happen again.

It's essential that we all continue to work together to increase the resilience

of

the

Treasury

market-and

this

conference

is

a

great

opportunity

to move that process forward.It's

also

clear

that

we

need

not

start

from

a

position

of

how

things

are,

but

instead,

how

they should be.

Let's not think of how we can reform, but how we can design.

Let's create a system that can better withstand the unforeseeable and the unpredictable.

## ConclusionThese are difficult, complicated issues.

But complexity doesn't need to get in the way of getting back to principles or impede necessary action.

Look no further to what we just accomplished with LIBOR.

On January 1st, we are taking a giant leap in moving to a post-LIBOR world.

That's a

monumental

feat

for

financial

market

reform-and

it

was

made

possible

by

a

significant, prolonged, and coordinated effort by the private and official sectors across the globe.With Treasury market reform, we must take the same approach of bringing together the best ideas from the public and private sectors.

Three episodes of market dysfunction over the past decade

are

too

many.

Let's

work

together

to

build

a

system

that

is

truly

resilient

and

can withstand the challenges of our time-and of the future.Thank you.Recent Disruptions and Potential Reforms in the U.S. Treasury M arket: A

Staff Progress Report, Inter-A gency Working Group for Treasury M arket Surveillance, November 8, 2021. 1For

a

history

of

the

Desk

statement

on

repo

operations

during

that

period,

see Repo

and

Reverse

Repo Operations: Statements and Operating Policies.

Details on the parameters of the repo operations during this 2BIS central bankers' speechesperiod can be found at Historical Repurchase A greement Operational Details.- Recent Disruptions and Potential Reforms in the U.S. Treasury M arket: A

Staff Progress Report, Inter-A gency Working Group for Treasury M arket Surveillance, November 8, 2021. 3