The Treasury Market May Be So Big That the Fed Can’t Step Away

(Bloomberg) -- The Treasury market is now so large that the U.S. central bank may have to continue to be involved to keep it functioning properly, according to Federal Reserve Vice Chair for Supervision Randal Quarles.

The U.S. rates market has faced several significant dislocations in the past couple of years, most notably in March, when the pandemic roiled global assets. In response, the Fed has expanded the toolkit it uses to help ensure market stability, including the implementation of new repurchase-operation facilities and swap lines. It also restarted direct purchases in the bond market, and is still buying about $80 billion of Treasuries a month.

Meanwhile, America’s debt pile has exploded to more than $20 trillion, from roughly $13 trillion five years ago, and the economic fallout from the pandemic means it is set to expand even more.

The Treasury market may now be so large that it may have outpaced the ability of the private sector to cope during periods of stress, Quarles said at a virtual panel discussion Wednesday. That means that there’s an “open question” -- one that Quarles said he has yet to arrive at an answer on -- about whether there will be an indefinite need for the Fed to participate as a purchaser to support market functioning, he said.

“It may be that there is a simple macro fact that the Treasury market being so much larger than it was even a few years ago, much larger than it was a decade ago and now really much larger than it was even a few years ago, that the sheer volume there may have outpaced the ability of the private market infrastructure to support stress of any sort there,” Quarles said.

Related story on Quarles’s comments.

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