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NY Fed President Dudley Comments on Mounting Concerns over Liquidity

NY Fed President Dudley Comments on Mounting Concerns over Liquidity

Ryan Cox,

Talking Points:

  • NY Fed President Dudley Speaks in New York on regulation and liquidity provision
  • He would address concerns from market participants over high-frequency trading and regulations on liquidity
  • Dudley gave commentary on the Fed’s position and outlook going forward

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Concerns over market liquidity have been voiced by market participants from sources such as effects of high-frequency trading and regulation on volatility. In a speech given by New York Fed President William Dudley Wednesday in New York, the central banker spoke on regulation and liquidity provision. His comments addressed those concerns and spoke to worries that some have over US regulations diminishing bond market liquidity which many believe could be exacerbated by the Fed’s eventual rate hike.

The flash crash of October 15th 2014 saw the yield on the 10-year US Treasury note fall 34 basis points, from 2.2 percent to as low as 1.86 within minutes – extreme volatility for a market that is expected to be remarkably stable. Dudley stated that he doesn’t see lasting fallout from this ‘flash crash’ on bond markets and that it is not clear that regulation was a major contributory to that liquidity issues. However he mentioned treasury market liquidity risk may also reflect high frequency-trading growth where high frequency-traders may add to temporary illiquidity.

Furthermore, he said there hasn’t been a shortage of treasuries or much evidence to show that treasury market liquidity has diminished. Dudley made further comments related to the Fed’s position and possible impact going forward:

  • Fed doesn’t intend to do asset sales, would lead to volatility
  • Fed not seeking a particular level of liquidity in markets
  • Fed QE may have affected recent measures of liquidity
  • Fed will make sure Q/E withdrawal won’t roil markets
  • Expects volatility to mount as fed liftoff gets closer

Upcoming Speeches from Central Bank Officials:

  • (Thu 10/01 00:15 GMT) Fed’s Brainard Speaks
  • (Thu 10/01 18:30 GMT) Fed’s Williams Speaks
  • (Fri 10/02 01:30 GMT) ECB’s Draghi Speaks
  • (Fri 10/02 12:45 GMT) Fed’s Harker Speaks
  • (Friday 10/02 16:30 GMT) Fed’s Bullard Speaks
  • (Friday 10/02 17:30 GMT) Fed’s Fischer Speaks
  • (Tuesday 10/06 21:30 GMT) Fed’s Williams Speaks

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