Philip N Jefferson: Opening remarks - 18th Central Bank Conference
Opening remarks by Mr Philip N Jefferson, Member of the Board of Governors of the
Federal Reserve System, at the 18th Central Bank Conference on the Microstructure of
Financial Markets, Board of Governors of the Federal Reserve System, Washington
DC, 19 October 2023.
* * *
It is my pleasure to welcome you to the 18th Central Bank Conference on the
Microstructure of Financial Markets. This is the first time that this event has been held
at the Federal Reserve Board, and we are very pleased to host the conference.
Before I begin, let me remind you that the views I will express today are my own and
are not necessarily those of my colleagues in the Federal Reserve System.
Our guests include academics from a number of institutions, both in the U.S. and
abroad; fellow central bankers, including colleagues from the Bank of England, the
Bank of Japan, and the Bank for International Settlements; and friends from across the
Federal Reserve System and from several U.S. government agencies, such as the
Commodity Futures Trading Commission (CFTC), the Securities and Exchange
Commission (SEC), and the U.S. Treasury, including the Office of Financial Research
(OFR).
Now, since this is what you have gathered here to discuss, I do not have to convince
this group of the critical importance of well-functioning financial markets for the
economy. In my case, coming as a macroeconomist from the academic world to the
Federal Reserve has only reinforced that conviction.
Market Microstructure Is Important
Central bankers, regulators, and market participants ask a lot of financial markets. We
want financial markets to be effective and efficient, and to aggregate and reflect all
pertinent information. We rely on these markets to help us gauge how the economy is
performing, to help us measure market expectations of monetary policy, and even to
help us predict how the economy might evolve in the future. We want financial markets
to be deep and liquid in good times, but also to remain deep and resilient when the
economy is stressed. We want financial markets to be fair, so as not to favor certain
participants. And central bankers, obviously, rely critically on financial markets for the
implementation and transmission of monetary policy. As we have broadened our
arsenal of policy tools over the past two decades and as markets have become larger,
more complex, and more diverse, I would argue that it has become even more critical
for us to understand in detail how financial markets operate.
Effective and efficient financial markets do not happen automatically. The precise
structure of each financial market, its trading rules, the mix of market participants and
the constraints they face, how and how fast information is transmitted, all part of the
microstructure of that market, do make an important difference. I think that fact has now
become more widely recognized by economists. But it was not the case just a couple of
decades ago, when most macroeconomists almost routinely assumed in their models
that financial markets would function perfectly in the background. I believe that has
changed-witness, for instance, the growth of macrofinance in recent years-and that
change has certainly been an improvement.
A Few Words about the Program and Interagency Work
Now, let me say a few words about the first financial market this conference will focus
on, the market for U.S. Treasury securities. The U.S. Treasury market clearly remains
the largest and deepest government securities market in the world. But it has changed
a lot. To quote a recent speech by our former Fed colleague Nellie Liang, who is now
the Under Secretary for Domestic Finance at the Treasury, "The market has changed
significantly over time, with changes in technology, participants, and regulations, and
Treasury debt outstanding has grown substantially."1
Some episodes of stress in the Treasury market, including a flash event in 2014 and,
more recently, the Treasury repo market disruptions of September 2019 and the
socalled dash-for-cash episode in 2020, have focused the attention of researchers and U.
S. government agencies on the plumbing of the market and on the composition and
behavior of its participants. For example, an interagency working group, composed of
staff from the U.S Treasury, the SEC, the CFTC, the New York Fed, and the Board of
Governors-several members of the group are here-has been studying a broad range of
ideas to enhance the resilience of the market. The U.S. Treasury has also spearheaded
initiatives to enhance data transparency. And the SEC has sought comments on
several proposals that could materially alter the structure of the market.
The Federal Reserve does not regulate markets, but we obviously have a special
interest in the Treasury market, in part because some of our policy tools operate
through that market and because of how important Treasury market functioning is to
financial stability. And the recent discussions on the Treasury market have involved a
lot on market microstructure and market design, including questions such as the
following:
Is the current intermediation capacity of dealers sufficient given the size of the
market?
Would an increase in the share of transactions that are centrally cleared help that
intermediation capacity?
Is a decentralized dealer-intermediated market optimal, or could an all-to-all
market for Treasury securities be more resilient under stress?
What are the respective roles of banks and nonbanks in this market?
Are the incentives faced by market participants naturally leading the Treasury
market to become more resilient over time? Or would some carefully crafted
intervention be helpful?
As you can hear, this list of research questions contains a heavy dose of market
microstructure content. Why am I sharing them with you? Just to make my final point:
As economists focused on market microstructure, what you do is important, and what
you do is immediately relevant.
So, again, welcome to the Federal Reserve Board. I wish you an excellent conference.
See Nellie Liang (2022), "Remarks by Under Secretary for Domestic Finance Nellie
Liang at the 2022 Treasury Market Conference," remarks, November 16.