NY Fed's Williams on Rates, Repo
The New York Times recently published a transcript of an interview with New York Fed President John Williams. The full interview, entitled, "The New York Fed President Sees Interest Rates Coming Down With Inflation," mentions money markets about two-thirds of the way through. The Times asks, "[H]ow much is too much on QT?" Williams responds, "We're watching that, obviously, very carefully. Both looking at market prices and quantities and all that, but talking to market participants, talking to financial institutions, trying to understand the different factors. Right now, I think that all of the indicators are saying the same thing: the amount of reserves in the system, the stability of money market rates like the fed funds rate and other interest rates like SOFR, they're all showing us that we're in what we think of as an abundant reserves regime. We're in a region where there's plenty of reserves out there on a day-to-day basis. The federal funds rate doesn't move around very much, and other short term interest rates are very stable and consistent with the setting of monetary policy by the FOMC. We analyze a lot of different dimensions of that, and they all say the same thing: There's a large supply of reserves beyond what is absolutely needed to carry out monetary policy. And of course, we still have over $1.7 trillion in the reverse repo facility, which is another buffer, if you will, and we've seen usage of that come down pretty dramatically as the US Treasury has rebuilt their account at the Federal Reserve and issued T-bills. As the market has more short-term instruments that they can invest in, they're pulling the money out of our overnight reverse repo facility, which is working exactly as planned, and exactly as we would want to do." They also ask, "What have you changed in your monitoring from the last time you were doing QT, when obviously you missed and got to that point of reserve scarcity?" He comments, "I think there are several things that are different from September 2019. One is, at that time, the committee, the Federal Open Market Committee, was really aiming to get to a minimum level of reserves that was consistent with the efficient operation of monetary policy.... The second factor: We have the standing repo facility, we have the ability to provide extra liquidity, reserves into the system on an automatic basis, that provides a backstop for the market. In the end, what we needed to do in late 2019 was really actively add reserves into the system through our repo operations, and other operations after that. If there is stress in the market, or interest rates are going up, that facility is there, and everyone knows it's there." Williams adds, "That is a second lesson of the Fall of 2019. It wasn't just that on a given day that there was a shortage of liquidity in the market, and that caused interest rates to go up somewhat, it was also a concern in the market about tomorrow, and the day after, and the end of the month, and the end of the quarter. `Market participants are understandably, when there's a shortage of liquidity, worried about: What's going to happen in the future? Do I need to hunker down and preserve my liquidity because I'm not sure where it's going to be? I think our framework that we have in place now, the standing repo facility, all of these not only give us a good starting point to make sure there's ample reserves, but they also provide that assurance that if for some reason there's a shock to the demand or supply reserves, that liquidity will be there automatically."
