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The Federal Reserve “would absolutely be prepared” to deploy its firepower to stabilise financial markets should conditions become disorderly, according to one of the central bank’s top officials.
Susan Collins, head of the Boston Fed, said “markets are continuing to function well” and that “we’re not seeing liquidity concerns overall”. But she said the central bank “does have tools to address concerns about market functioning or liquidity should they arise”.
“We have had to deploy quite quickly, various tools” she told the Financial Times, referring to past interventions to address chaotic conditions in markets. “We would absolutely be prepared to do that as needed.”
Collins’s remarks come amid a week of intense turbulence in US markets after President Donald Trump launched a global trade war, triggering fears of recession. Selling that began in Wall Street stocks last week has now cascaded into the $29tn Treasury market, which sits at the heart of the global financial system.
The Boston Fed chief spoke to the FT as another top US central bank official, the New York Fed’s John Williams, warned that Trump’s tariffs could send inflation sharply higher, push up unemployment and significantly weaken the country’s economic growth.
The Boston Fed president also expected inflation could well be above 3 per cent this year. She said emergency rate cuts would not be the primary tool for responding to any deterioration in market function.
“The core interest rate tool we use for monetary policy is, certainly not the only tool in the toolkit and probably not the best way to address challenges of liquidity or market functioning,” she said.
The 10-year Treasury yield, a benchmark for trillions of dollars in assets worldwide, has jumped 0.5 percentage points to 4.5 per cent over the past week, a huge move for an asset that usually trades in small increments.
Wall Street banks and investors have said that liquidity, or the ease at which traders can buy and sell without moving prices, has worsened as volatility has picked up in the Treasury market.
Jay Barry, a JPMorgan fixed-income strategist, said on Friday, “liquidity is bad because volatility is high . . . The moves are enormous but the market functioning is OK.”
He added that the sell-off in Treasuries had so far been “orderly”.
Collins said any intervention by the Fed would depend on “what conditions we were seeing”.
The central bank intervened during a period of major market dysfunction during the coronavirus crisis in 2020, when critical funding markets seized up as investors were gripped with fears over how the pandemic would affect the global economy.
The Fed stepped in by reinstating financial crisis-era programmes that work as a pressure release valve for borrowing markets, while also launching unprecedented purchases of corporate debt. The central bank also cut rates to near-zero and removed its cap on the amount of Treasuries it could purchase as part of its 2020 interventions.
Collins said on Friday that the Fed has at its disposal “additional standing facilities that can help to support market function, that are already in place”.
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