Michelle W Bowman: Design issues for central bank facilities in the
future
Remarks by Ms Michelle W Bowman, Member of the Board of Governors of the Federal
Reserve System, at the Chicago Booth Initiative on Global Markets Workshop on
Market Dysfunction, Panel "Design issues for central bank facilities in the future",
Chicago, Illinois, 3 March 2023.
* * *
Thanks, Anil. It's a pleasure to be with you today and to be part of this discussion on
how central banks can support the effective functioning of financial markets.1
Financial stability is essential for a well-functioning economy. A financial system is
considered stable when its markets and institutions are resilient and able to function
even following a severe shock. The Federal Reserve monitors risks to financial stability
and uses its supervisory and regulatory tools to mitigate the risks and consequences of
financial instability. During periods of financial system stress, the Federal Reserve can
use additional tools, such as lending facilities and open market operations, to directly
support the effective functioning of key financial markets and the flow of credit
throughout the economy.
The onset of the global pandemic in the spring of 2020 was a severe shock both to
financial markets and to the U.S. economy, and the Federal Reserve responded
forcefully to support market functioning and the flow of credit. To address the liquidity
strains in Treasury and repo markets, the Fed directly purchased large amounts of
Treasury securities and conducted term and overnight repo operations using the
FOMC's open market operations authority. To address strains in other markets, with the
backing of the U.S. Treasury, the Fed used its 13(3) emergency lending authority to
establish a number of facilities to support the flow of credit to households, businesses,
2
and communities. The Federal Reserve also took a number of other actions, including
easing terms on discount window lending and supervisory and regulatory actions, to
encourage banks to lend and act as market intermediaries.3
The Fed's actions were effective in restoring financial market functioning, but the
channels through which they operated varied. Significant asset purchases and take-up
of the Fed's repo operations were required to restore smooth functioning in Treasury
markets because of the liquidity needs of a wide swath of investors. By comparison,
many of the 13(3) lending facilities saw relatively limited take-up, but they helped
support market functioning and the supply of credit in the targeted markets by offering a
backstop and bolstering investor confidence.4
The pandemic lending programs that experienced more usage saw a decline in use as
market functioning was restored, which is a key benefit of lending programs compared
with asset purchases. Moreover, shorter-term loans under these programs were
relatively quick to roll off the Fed's balance sheet. In fact, most of the lending programs
expired by late 2020. And some of the emergency securities purchase programs, such
as the Secondary Market Corporate Credit Facility, sold the securities they had
purchased during their wind-down phases.
The pandemic experience demonstrated the effectiveness of lending programs
designed to serve as backstops to support market functioning and the flow of credit in
times of stress. The temporary nature of loans from lending facilities activated only
under financial market stress adds to the attractiveness of these tools. Lending
programs are most effective as backstops when loans are offered at a penalty rate and
are of short duration. When appropriately calibrated, lending programs can help
promote market functioning but limit the Federal Reserve's overall footprint in financial
markets in the longer term.
The pandemic experience illustrated that liquidity strains can sometimes be so severe
that targeted purchases of the affected assets may be the most effective tool to quickly
support market functioning, as was the case in Treasury markets in the spring of 2020.
In taking this step, a key issue for central banks to consider is how to clearly distinguish
5
asset purchases from the central bank's monetary policy actions. This would be
especially important during a period of monetary policy tightening, as we are currently
experiencing. A related issue is how to minimize the Fed's footprint and amount of
asset purchases needed to restore market functioning. A further consideration is how to
construct and communicate an exit strategy to reduce the enlarged balance sheet over
time.
Finally, while it is important to consider the design of central bank tools to address
future episodes of severe financial market dysfunction, it is also important for central
banks and other agencies to ensure that regulations and market oversight foster
prudent financial institution behavior and resiliency in core financial markets. Doing so
can increase the ability of private markets and institutions to function during times of
stress and reduce the likelihood of future market interventions by the central bank. In
this regard, it is important for the Federal Reserve to engage along with the other
agencies in a thoughtful consideration of possible regulatory adjustments and structural
reforms to increase the resiliency of the Treasury markets and reduce the likelihood of
future market dysfunction.6
Thank you, again, for the opportunity to chair this panel. I look forward to our discussion.
1
These remarks represent my own views, which do not necessarily represent those of
the Federal Reserve Board or the Federal Open Market Committee.
2
The Fed also used its open market operations authority to purchase agency
residential and commercial mortgage-backed securities and conducted repo operations
with an expanded set of global counterparties. Some of the 13(3) facilities were
versions of those that had been used during the 2008 financial crisis and others were
new, such as corporate credit facilities, which directly purchased corporate bonds to
support the flow of credit to the economy. All 13(3) lending facilities require the approval
of the Secretary of the Treasury. For further details, see Board of Governors of the
Federal Reserve System (2021), " Funding, Credit, Liquidity, and Loan Facilities ,"
webpage.
For a further description of these actions, see Board of Governors of the Federal
Reserve System (2021), "Supervisory and Regulatory Actions in Response to COVID-
19 ," webpage.
4
For a discussion of the 13(3) lending facilities and their usage, see Board of
Governors of the Federal Reserve System (2020), Financial Stability Report (PDF)
(Washington: Board of Governors, November).
5
This issue is most relevant when the assets purchases are those that the Fed can
purchase using its open market operations authority, including Treasury and agency
debt and agency-backed mortgage-backed securities. Programs to purchase other
types of debt would need the approval of the Secretary of the Treasury under section 13
(3) of the Federal Reserve Act.
6
For a discussion of potential reforms, see Inter-Agency Working Group on Treasury
Market Surveillance (2021), Recent Disruptions and Potential Reforms in the U.S.
Treasury Market: A Staff Progress Report
(PDF)(Washington: U.S. Department of the
Treasury, November); and Inter-Agency Working Group on Treasury Market
Surveillance (2022), Enhancing the Resilience of the U.S. Treasury Market: 2022 Staff
Progress Report (PDF)(Washington: U.S. Department of the Treasury, November).