Investing.com -- Lorie K. Logan, President of the Federal Reserve Bank of Dallas, recently addressed the 2025 Financial Markets Conference held by the Federal Reserve Bank of Atlanta in Amelia Island, Florida. The central theme of her speech was the necessity for the US central bank to strengthen the mechanisms that prevent money-market interest rates from escalating during periods of market stress.
Logan emphasized the critical role of Treasury and money markets in the financial system, financing the U.S. government, providing safe and liquid assets for global investors, and establishing overnight risk-free interest rates. She also highlighted the interconnected nature of these markets, specifically citing the repo market where Treasury securities are financed.
Despite their robustness, Logan pointed out potential vulnerabilities in these markets, including limited intermediation capacity, leverage buildups, and inconsistent risk management. She stressed that the balance sheet capacity of bank-affiliated dealers has not kept pace with the growth in the amount of Treasury securities outstanding, which could potentially lead to market dysfunction during economic shocks.
Logan suggested that enhancing the resilience of intermediation capacity could involve both banks and nonbank financial institutions (NBFIs). She expressed her anticipation for a detailed discussion on strengthening Treasury intermediation by NBFIs.
Excessive leverage, according to Logan, can exacerbate challenges during stress episodes. She noted that levered positions could unwind rapidly, increasing intermediation demands. However, she expressed relief that the basis trade did not significantly amplify market volatility experienced in early April.
In terms of risk management, Logan praised the Securities and Exchange Commission’s mandate for broader central clearing as a significant step to strengthen risk management in the Treasury cash and repo markets. She suggested that broader central clearing would ensure stronger, more uniform, and therefore more resilient risk management.
Logan also discussed the role of resilient funding liquidity in market resilience, emphasizing the importance of a strong Federal Reserve monetary policy implementation framework. She highlighted the Fed’s rate control framework, which includes an ample supply of reserves and standing ceiling facilities, as key components in preventing rate spikes during unexpected shocks.
Logan suggested several ways to further strengthen these tools. She encouraged continued improvement in operational readiness to borrow from the discount window and emphasized the need for the Federal Reserve Banks to enhance their capacity to efficiently serve customers. She also suggested enhancing the Standing Repo Facility ( SRF (NSE:SRFL)) by introducing regular early-settlement SRF operations and central clearing of SRF operations to allow bank-affiliated dealers to net down their balance sheets.
In conclusion, Logan emphasized the importance of strengthening the mechanisms that prevent money-market interest rates from escalating during periods of market stress to ensure the stability and resilience of the financial system.
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