(Reuters) – A major lesson from the global financial crisis and from the financial shock caused by the coronavirus pandemic is that central banks should maintain the tools needed to quickly address market disruptions caused by firms facing immediate liquidity needs, a senior official for the New York Federal Reserve said on Wednesday.
Two facilities established by the Fed last month, including a domestic standing repo facility (SRF) and a repo facility for foreign and international monetary authorities, should serve that role and help markets function smoothly during times of stress, said Lorie Logan, an executive vice president in the Markets Group at the New York Fed and the manager of the System Open Market Account.
“The presence of these facilities should create confidence that liquidity at a backstop rate will be available in overnight money markets as needed, potentially limiting the demand for
precautionary liquidity and the run-like dynamics that can occur,” Logan said.
The domestic standing repo facility, with a minimum bid rate of 0.25%, should help to keep the effective federal funds rate from spiking above the Fed’s target range, Logan said.
In some circumstances, markets will calm down from the knowledge that the Fed is willing to provide future support as needed through emergency measures, Logan said. But such announcement effects may not be as strong when there is an immediate need for U.S. dollars, she said.
(Reporting by Jonnelle Marte; Editing by Chizu Nomiyama)
