Fed’s Mester Isn’t Worried Central Bank Has Broken Market Pricing Ability
The Federal Reserve’s massive intervention into financial markets amid the coronavirus crisis has improved conditions and hasn’t upended the private sector’s ability to price securities, as some in the market worry, Cleveland Fed President Loretta Mester said Friday.
Ms. Mester was addressing the bailout of financial markets over recent weeks. The Fed launched an unprecedented effort to help shore up financial markets and the broader economy, as large sections of the nation have shut down to help reduce the threat of coronavirus-related illness.
A key part of that response has been the intensifying intervention of the Fed in a range of markets, with the Fed buying Treasurys, mortgages, local government debt and private securities. The Fed’s efforts have been so aggressive and sweeping that some have worried that it is breaking investors’ ability to determine true value and price securities accordingly. There is a worry that the longer the Fed’s intervention goes on, the more damage will result.
Ms. Mester, who was speaking at a virtual gathering of the City Club of Cleveland, rejected that view. She said the Fed has worked at making sure markets can function and its efforts haven’t aimed at setting prices.
When it comes to pricing securities at the time of the Fed’s first interventions, Ms. Mester said, “I would submit the market wasn’t doing it.” She said, “The markets were totally disrupted, they were dysfunctional. And so we need to do these things to keep the markets going and to keep them working.”
“We are making some of the market” with current interventions, but markets are now “much more improved” and “the pricing has come back to work,” Ms. Mester said. The Fed’s interventions “were very appropriate things for the Federal Reserve to do,” she said.
Ms. Mester said the Fed is ultimately indifferent to what the price of a security is. Instead, it wants to make sure there’s enough liquidity in the market for the trade to happen.
In other comments, Ms. Mester said the Fed may not be done offering help to the economy, and if it spies a place where it can act and make a difference, it will do so. She also said the public-health response will determine the possible timing of recovery, which creates uncertainty about the outlook.
Meanwhile, Federal Reserve Vice Chairman for Supervision Randal Quarles, speaking in a separate video appearance, offered a more upbeat look ahead.
“Given the nature of this shock, there is every reason to believe that we come out on the other side of this with an economy that is essentially on par,” and “can be revived without permanent damage,” Mr. Quarles said.
He also said measures the Fed has taken in conjunction with the Treasury Department and that Congress put in place are designed to ensure the “hibernation period” that the nation goes through entails the “least amount of permanent damage.” But he added, there is a “material amount of uncertainty as to when exactly we will come out on the other side.”