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Former NY Fed President Bill Dudley on US Treasury market

Former NY Fed President Bill Dudley says a standing repo facility is something Fed will take long look at but will take deep dive of what can do to make market more functional.

Video Transcript

BILL DUDLEY: Well, people are still unpacking exactly what happened in the treasury market in March and April. Initially it was all about the hedge funds, having these levered trades, long cash, short futures. But then as people looked into it and with more detail, they realized there was a lot more than that going on. In fact, the lack of capacity among the dealer community to provide balance sheet I think was an important factor.

I think what we found is that the Fed, the Federal Reserve, is the only entity that actually has an elastic balance sheet that can grow to supply liquidity to meet the demand. And I think what the Fed is going to be looking at is can we have something in place-- not ex post after the fact, but ex ante-- that's available as a place to people to go if they need to finance their treasuries or the agency mortgage-backed securities. If we had that in place, it would do two things. One, people would know that their balance sheet, you know-- there was a balance sheet available that they could finance these securities, so they'd be less hesitant to dump those securities, and that would be very reassuring to people.

So I think, you know, a standing repo facility of some sort, I think, is something that the Fed is going to take a very long look at. Now doing that is not going to be something that happens very quickly because the devil's in the details. You know, if you have a standing repo facility, what rate do you charge? Who's eligible? How does it work? How does the plumbing work? In other words, how do you actually do the transactions?

So I don't think that's something that's going to arrive in the next six months or a year, but I think the Fed is going to do a very deep dive into what happened in the treasury market and ask themselves the question, what can we do to make the treasury market function even in bad times well-- function well in bad times.