Fed Vice Chairman Randal Quarles, who is also the head of the Financial Stability Board (FSB), said Tuesday that a panel of financial regulators will come up with recommendations in July on enhancing the resilience of money market funds and reducing the probability of future government assistance, but he did not specify the measures.
In addition, he noted that the panel will focus on the relationship between money market funds and short-term funding markets, particularly the commercial paper market, which suffered a run on the funds last March because of a liquidity crunch that necessitated government intervention.
Speaking at a related event organized by the Peterson Institute for International Economics, he said.
The market turmoil in March (last year) was the second Time in about a decade that we have faced turmoil that has shaken the stability of the market. And it’s worth noting that the measures we took in the middle of these events were designed to prevent the possibility of similar turmoil happening again.
He also cited data that last year, U.S. institutional quality money market funds had outflows of about $100 billion in two weeks, accounting for 30 percent of fund assets, which was more severe than the impact of the 2008 financial crisis.
In an article for the online edition of the National Review, Jon Hartley, a master’s student at Harvard’s Kennedy School, also discusses the risks to money funds, and his preferred option is to bring them under a bank-like deposit insurance system.
Among the reform paths being considered, money fund insurance is the easiest to implement, requiring only a small premium to be paid to the relevant insurance fund, while allowing money funds to operate in much the same way as they do now. Of course, the premiums need to be perfectly balanced so as not to interfere with the operation of the money fund, but also to meet the potential need for liquidity insurance in times of financial stress.
“Investors should trust the Fed.”
At the end of his speech, Quarles also expressed his attitude towards the current Inflation. He believes that investors should trust the Fed’s stance, which is to allow inflation to be slightly above the 2% target.
I think it can be optimistically estimated that the Federal Open Market Committee (FOMC) will be satisfied with inflation slightly above the 2% target, and we will focus on the longer-term average, which will be a very credible commitment of the FOMC, and I am very supportive of it.
In August 2020, the Fed had set a new policy framework in which the longer-term average inflation target was set at 2%, but at the same time, rate hikes would depend not only on inflation, but also on the full employment gap.
In this regard, Quarles said he is one of the most optimistic among the FOMC, the new policy framework means that, despite his optimistic expectations that the economy will grow and unemployment will fall, but he still hope that the relevant forecasts in the data to come true:.
We (on the issue of interest rate hikes) should not jump the gun, should wait until the results fall before making a move. Obviously, not only the past decade, but also looking back at 15 or even 20 years of macroeconomic and monetary policy performance means that this will bring excellent results.
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