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Some Federal Reserve officials called for stronger tools and communication to tackle possible Treasury market disruptions, while seeking to limit the central bank’s footprint in government debt markets.
Federal Reserve officials discussed the need to prepare for potential stress in the US Treasury market at their September policy meeting, even as some policymakers said the market was functioning smoothly.
Minutes of the Federal Open Market Committee’s September 15-16 meeting showed that several officials supported strengthening the Fed’s strategy, communication and tools for responding to market dysfunction.
The officials also stressed that any intervention should limit the Federal Reserve’s footprint in the Treasury market.
The discussion comes as US government bond yields have climbed sharply in recent weeks, pushing borrowing costs higher and raising concerns about the impact of elevated inflation, large fiscal deficits and geopolitical risks.
The Fed raised its benchmark interest rate by 25 basis points at the September meeting to a range of 3.75 per cent to 4 per cent. Policymakers also signalled another rate increase could come before the end of the year.
The rise in Treasury yields has already fed into the broader economy, with US 30-year mortgage rates recently reaching their highest level in nearly three years.
Fed officials have attributed the increase in yields to a resilient economic outlook, strong technology investment and geopolitical risks. But the scale of the bond market move has prompted some investors and analysts to question whether market functioning could come under pressure.
More from BusinessThe Fed’s balance sheet is central to the debate. During periods of severe market stress, including the early stages of the COVID-19 pandemic, the central bank bought large amounts of Treasury and mortgage-backed securities to stabilise financial markets.
However, new Fed Chair Kevin Warsh has favoured a smaller balance sheet and has tasked a group with examining ways to reduce the central bank’s holdings.
Analysts said the latest minutes suggest the Fed would initially rely on existing liquidity tools, including standing repo operations and the discount window, rather than immediately resorting to large-scale bond purchases.
Still, not all Fed officials see an immediate need for intervention. Minneapolis Fed President Neel Kashkari said last week that the Treasury market appeared to be functioning well and that he saw no financial stability risk requiring Fed action.
