Logan says Treasury market functioning ‘very well,’ Fed needs to strengthen support tools

Nov 13 (Reuters) – While the US Treasury market is functioning “very well” despite bouts of interest-rate volatility and banks have improved their access to contingent funding in the last three years, the Federal Reserve should take steps to strengthen its support tools in both arenas, Dallas Fed President Lorie Logan said on Friday. Logan, an influential voice on the Fed’s ​operational tools given her previous role as the New York Fed’s chief of open market operations, said it is critical ‌that Fed efforts to backstop Treasury market functioning “must avoid working at cross purposes with monetary policy.” “Especially in an economic environment where tighter policy appears necessary, I believe it is prudent for the FOMC (Federal Open Market Committee) to strengthen its tools for supporting market functioning without providing unnecessary economic stimulus,” Logan said in remarks to a Dallas Fed conference on bank funding. To be clear, Logan does not see the need for any market intervention currently, but warned that interventions during a ‌policy-tightening cycle ​like the one underway now complicate the Fed’s communications challenges. “Historically, the Fed’s interventions to ⁠support market functioning have come at times when ⁠the FOMC also wanted to stimulate economic activity,” she said. “The same asset purchases could serve two purposes: providing monetary policy accommodation and supporting market liquidity.” “If Treasury market dysfunction emerged now, the FOMC would not have the luxury of using the same asset purchases to accomplish two goals,” Logan said. “And even if the FOMC wanted to provide accommodation, using one tool to achieve two ​goals can muddy communications and make it more difficult to act decisively.” Logan reiterated her view from a speech earlier this week that with inflation trending too high, it is necessary to make policy more restrictive. On Tuesday she laid out the case for the Fed ⁠to raise rates by a quarter percentage point at least two more times, ⁠perhaps quickly. After raising its policy rate by a quarter point in September, the Fed late last month ​left rates unchanged. Stronger-than-expected inflation data this week and comments from other Fed officials, including influential Governor Christopher Waller, have fueled a rise in ​market bets that the Fed may deliver a half-point hike at its meeting in early December. BANK CONTINGENT FUNDING Logan ‌said banks have taken steps to improve their access to contingent funding — or access to liquidity during periods of funding market stress — and should continue to prepare for access to facilities like the Fed’s discount window. For its part, the Fed could take measures to improve its lending tools, she said. With the growth of payments services like FedNow and others from the private sector, banks could face liquidity needs on weekends ⁠and holidays. Moreover, with the Fed planning to extend the operations of its Fedwire Funds wholesale payments system to Sundays and weekday holidays within the next two to three years, the Fed should also extend discount window operations to weekends and holidays. “This is not a change ⁠any one Reserve Bank can make on its ‌own,” she said. “I look forward to discussions with my colleagues about this possibility.” Logan also urged the ⁠Fed to develop the operational ability to have its repurchase — or repo — operations centrally cleared and ​put that to ‌use. “This would reduce the balance sheet costs of intermediation,” she said. “Funding from the Fed could then ​flow more ⁠efficiently to the broad market.” The Fed should also further develop its ability to lend to the eight “designated financial market utilities” — entities including the major clearing houses, the Depository Trust Corp and Chicago Mercantile Exchange — during unusual or exigent circumstances, Logan said. While severe liquidity stress at a DFMU is “an extreme and unlikely scenario,” Logan said, “the Fed might have only a matter of hours to decide on and execute such a loan.” Therefore, “it would be desirable in my view for the Fed to further develop its operational readiness to lend to DFMUs under appropriate circumstances.” (Reporting by Dan Burns; Editing ​by Paul Simao and Andrea Ricci )