Fed governor urges regulation, oversight foster ‘prudent financial institution behavior’ in core markets

It’s important that central banks and other regulators ensure that regulations and market oversight foster prudent financial institution behavior and resiliency in core financial markets, a Federal Reserve Board governor said Friday.

In remarks before a panel discussion about design issues for central bank facilities of the future (at the Chicago Booth Initiative on Global Markets Workshop on Market Dysfunction in Chicago), Fed Gov. Michelle Bowman said ensuring prudent financial institution behavior 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,” she said.

In describing the Fed’s response to the 2020 coronavirus crisis (which included setting up several facilities to lessen the financial impact of the pandemic), Bowman said that crisis 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 asset purchases from the central bank’s monetary policy actions,” Bowman said. “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.”

Governor Michelle W. Bowman: Panel on “Design Issues for Central Bank Facilities in the Future”