Lorie K Logan: Treasury market liquidity and early lessons from the pandemic shock

Remarks (via videoconference) by Ms Lorie K Logan, Executive Vice President in the Markets Group of the Federal Reserve Bank of New York, at Brookings-Chicago Booth Task Force on Financial Stability (TFFS) meeting, panel on market liquidity, 23 October 2020.

The views expressed in this speech are those of the speaker and not the view of the BIS.

As prepared for delivery

Good morning, and thank you to the Brookings Institution-Chicago Booth Task Force on Financial Stability for convening this discussion on such a critical topic. This has been a year marked by tremendous human suffering related to the pandemic and unprecedented challenges for the global economy and financial markets. The events that unfolded in March and April underscored the importance of understanding market functioning and liquidity so that financial markets continue to serve their important role in supporting the economy.

In the first quarter of 2020, the global financial system experienced an extraordinary shock, triggered by the coronavirus pandemic. Asset prices adjusted sharply, reflecting increasing pessimism and uncertainty about the economic outlook as large segments of the economy began to shut down. A spike in financial market volatility, combined with concerns about markets' ability to function in a remote work environment, resulted in a surge in the demand for cash.

The Federal Reserve took swift and decisive action in response to both the shift in the economic outlook and deteriorating conditions in financial markets. The Federal Open Market Committee (FOMC) cut the target range for the federal funds rate close to zero, and directed the Open Market Trading Desk (the Desk) to conduct repo operations and purchases of Treasuries and agency mortgage-backed securities (MBS) to support the smooth functioning of these markets. The Federal Reserve undertook a wide range of additional steps-many in coordination with the U.S. Treasury-to support the flow of credit to households, businesses, and state and local governments. Regulations were also temporarily adjusted to encourage bank lending. These comprehensive actions, alongside swift passage of the CARES Act to support the U.S. economy, were essential for stabilizing U.S. financial markets and averting an even deeper collapse in economic activity.