WASHINGTON?Federal Reserve Vice Chairman Stanley Fischer on Tuesday cautioned that market liquidity could be hit during times of severe stress, especially fire sales, but overall, liquidity is adequate.
"Reduced market liquidity might exacerbate fire sale risks from leverage at financial institutions or from first-mover advantage at mutual funds," Mr. Fischer said in prepared remarks at the Brookings Institution, a conservative think tank.
Mr. Fischer, the No. 2 official at the Fed, said leveraged institutions are "more sensitive" to changes in asset prices. Adverse changes in asset prices, margin calls and higher haircuts could wind up forcing firms to sell assets to obtain cash and deleverage, he said, affecting other market participants.
Still, Mr. Fischer said changes to market liquidity should be analyzed in the broader context of preserving a strong U.S. financial system.
Market participants have said changes in liquidity measures?such as bid-ask spreads, trading volume, market depth and the price impact of trades?all point to insufficient liquidity in U.S. Treasury markets.
Mr. Fischer, like other policy makers, has been careful not to dismiss concerns of market participants, but has said there is little evidence pointing to deterioration in liquidity.
"Overall, liquidity is adequate by most measures, in most markets, and most of the time," Mr. Fischer said. "Bid-ask spreads and price-impact measure point toward liquidity that is good by historical standards, and we have not observed declines in market liquidity in recent episodes of high market volatility."
Mr. Fischer said policy makers should continue to monitor and analyzemarket liquidity given looming regulatory changes and possible financial developments that could affect market dynamics.
Policy makers have argued it is a mistake to compare today's fixed-income market to the same liquidity benchmark before the financial crisis, given the significant changes to the market structure. There is broad consensus markets were too liquid, with too few controls, in the run-up to the 2008 financial crisis.
While Mr. Fischer said it is possible new rules meant to safeguard the U.S. financial system could be crimping market liquidity, on balance, the benefits of regulatory changes "may outweigh the potential costs of a possible reduction in liquidity."
Regulators have said markets have shown overall resilience, even during unprecedented volatility in U.S. Treasury markets on Oct. 15, 2014, or when high-yield bond fund Third Avenue Focused Credit Fund said last year it would block investors from redeeming money.Write to Donna Borak at email@example.com
(END) Dow Jones Newswires
November 15, 2016 14:55 ET (19:55 GMT)
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