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In part two of New York Federal Reserve President John Williams interview with Yahoo Finance's Brian Cheung, Williams discusses what impact meme stocks may have on the broader markets.
BRIAN CHEUNG: Welcome back to Yahoo Finance. I'm Brian Cheung, alongside New York Fed President John Williams. We're talking a bit about where the economy is right now, but the New York Fed also has interesting purview with regards to financial markets. It does a lot of the legwork in getting its quantitative easing asset purchases done. So I want to ask about some pressures that have been happening in the repo market, namely reverse repo.
A lot of these money market funds have been bursting at the seams with cash because of the quantitative easing, in addition to just the flow of US treasuries through the system. We've seen record subscriptions to the Fed's reverse repo facility as of the last week. I believe last Thursday was the record. Just wondering if you could offer a little bit of color on that. It seems like it's abnormal. Is there too much money floating around in money markets, from the Fed's view?
JOHN WILLIAMS: No, the system is working exactly as designed. When we thought about and set this up a long time ago, we wanted to make sure, in a situation where we're making asset purchases, you know, for our monetary policy goals, that the matching increase in liabilities would be distributed in the financial system efficiently and well. And a lot of it shows up in the banking system as reserves, but also some of it can show up through the overnight reverse repo facility.
And we have seen that get used quite a bit recently. We expected that to happen. It's working exactly as designed. Really, no concerns about that. It's a system that was put in place so that we didn't have problems [INAUDIBLE] and we're not having them. So it's to me, it's working really well, and the fact that funds are flowing between the banking system and the overnight reverse repo, this is kind of what we would expect to happen in this kind of circumstance.
BRIAN CHEUNG: Might we expect to see some changes to the cap to the overnight reverse repo, or maybe even the payment or the interest that's paid on [INAUDIBLE] to make sure that things are continuing to work properly [INAUDIBLE]?
JOHN WILLIAMS: Well, sure. And we've made clear that in the past. And we actually, going back to earlier days, we've made adjustments, technical adjustments to these administered rates and these programs, specifically to make sure they're working well. And for me, achieving the FOMC's goal of having the federal funds rate trading well within the target range. So we have the ability to adjust parameters of our administered rates or other parts of our program so that they work really well and keep interest rates where we want. So we can do that if that's called for. We've done it before and we've made those adjustments, and I think they've been successful. So we have-- not only is the program working exactly as designed, but we have the ability to tweak it, if you will, to make sure it's achieving exactly what the FOMC is looking for in terms of short-term interest rates.
BRIAN CHEUNG: All right, well we'll keep it inside baseball and we'll shift to a different topic when it comes to corporate bonds, so the announcement from the Fed yesterday that it's going to begin unwinding the $14 billion or so in corporate bonds and corporate bond ETFs that it had purchased to backstop the corporate bond market last year. It was the first time that the Fed did that, which means it's also going to be the first time the Fed is going to try and unwind that portfolio, which the New York Fed is going to be working on, as I understand it. As a reserve bank that's carrying this out, can you pull that off without making waves in the market? And how do you think about this within the grand scheme of the Fed trying to get out of some of the programs that it had last year?
JOHN WILLIAMS: Right. And as you know, we put those programs in-- not just this one, but the others-- in the midst of extreme market distress and turmoil back in March and April, in that period last year. And I would say that they, across the board, worked really well, both in making sure the markets were functioning well, and more importantly, that credit continued to flow to businesses, to households, to state and local governments. So those were put in in a moment of emergency when markets were under a lot of distress. They came in and did exactly what we were looking for, to make sure that credit is flowing. As you know, credit is the lifeblood of the economy.
And so they were successful. At the end of last year, most of those programs were shut down in terms of taking new business. And so of course-- and some of those just end because they're doing shorter-term lending, but for the corporate credit facility, we did buy corporate bonds, either through ETFs or individual bonds. And given the strength of the economic recovery, there are very good conditions in the corporate bond market, which is a very positive development for the economy.
It's an appropriate time to gradually and carefully unwind those positions that we accumulated last year. So of course, we're going to do this carefully, and making sure there's orderly market functioning. Markets are working really well right now, so I think it is appropriate. It's a relatively small portfolio relative to the enormous corporate bond market, so I think this is a good sign that the financial markets are working well. Some of these emergency things that I think were hugely successful and did exactly what we wanted them to do, we don't need those anymore. And we can close those down and move on.
BRIAN CHEUNG: Now, if we zoom out a little bit, maybe this is something that the Fed would prefer, but it seems like maybe the Fed is not the top headline right now when it comes to finance, and these people are reading things about Dogecoin or AMC stock. Just broadly speaking, when it comes to just the rise of retail investing, does any of that pose any sort of financial instability concern from your vantage point?
JOHN WILLIAMS: Well, this is something we take very seriously, not only the Fed, but the other regulatory agencies and the US government. So it's something to make sure that our financial system is both stable and serving the economy. Now clearly, there are questions that people are looking at in terms of investor protection and things like that that are really in terms of other regulatory agencies. But from my perspective, these issues don't really pose a financial stability concern. Where I look for financial stability concerns is really where you think about where there may be excessive risk-taking or leverage in the financial system that could pose a broader concern to the availability and the flow of credit. But obviously, these are important issues, but I don't think these are ones that are particularly about financial stability.
BRIAN CHEUNG: Copy that. And sorry, there's a siren going by. You live in New York, so you understand how this goes. But I do want to ask now about [INAUDIBLE], if I could do that. So there's been a lot of interesting commentary going on right now about how the Fed estimates what is the neutral rate of interest, kind of the rate that's neither stimulative nor restrictive for the economy. But there's been some commentary from the likes of [? Kristin ?] [? Forbes ?] at MIT, [? Jan ?] [? Hatzius ?] at Goldman Sachs about maybe missing the estimates with some of these structural things in play, like companies that might be getting more productive with the COVID shock or demographic trends. So I guess my question to you is, estimates of [? RSTAR ?] are very low right now. That's what's guiding your policy. How is the power of [? RSTAR ?] kind of changing with what could be structural changes to the economy?
JOHN WILLIAMS: Yeah, you know, that obviously is a question I think about a lot. I think a couple of things I would say is this COVID situation, at least in terms of thinking about those trends and the effects on the neutral interest rate, it's just really challenging. We have huge shifts in demand and supply, and all these things happening at once. So I think it's time to be appropriately humble about our ability to draw inference about how does this affect the neutral rate for the next 10 years, because I think we're still in the middle of the COVID episode, in terms of seeing how the economy behaves. So I'm kind of on a wait and see on some of that.
Again, I do go back to what do I think were the underlying trends that were driving the neutral interest rate lower for the past 25 years before COVID. It was demographics. It was low productivity growth. And I think it is a demand globally for safe assets, like US treasuries. So you know, those may have shifted a little bit, and we'll wait and see whether [INAUDIBLE] trends have improved, as we've all learned to work with technology differently. We'll see if demographic trends have changed.
But I think those were the big drivers, so those are things I'd be looking at to see if there's really a change in the neutral rate. My view right now, again kind of recognizing there's just a lot of uncertainty, is that neutral rates are still very low across the globe. And that's my working assumption. But I do think there's a lot of uncertainty about that, and we have to have open mind-- have an open mind about how that may have changed coming out of COVID. Last thing I just have to say on this is it's a global phenomenon, and for a lot of other countries, I think a lot of these factors are still holding the neutral rate down. They haven't really changed.
BRIAN CHEUNG: I mean, what might be the consequence, though, if the actual [? RSTAR ?] is above what you're estimating?
JOHN WILLIAMS: Well, I think it would be a sign mostly of stronger fundamentals for the economy-- stronger productivity growth, stronger labor force growth, some of those factors. So those are all positives. So I'd rather have, if I think about monetary policy, I'd rather have stronger kind of baseline growth and labor market, as is what I'm aiming for, in terms of what maximum employment is. So I think those would be very positive.
And they would imply that, in the long run, you would have, on average, somewhat higher interest rates, which would be consistent with a strong economy, but also clearly give us a little bit more room to adjust monetary policy when the economy is in a downturn or inflation's too low. So those are all positive. So if you did ask me, you know, what's a good thing for the long term for the economy would be fundamental factors that help push up [? RSTAR. ?] So I'm hoping for that, but we'll have to wait and see if the data really does support those changes or have [INAUDIBLE].
BRIAN CHEUNG: All right, well no one better to have that [? RSTAR ?] discussion with than you. But again, thank you so much for joining us here on Yahoo Finance, New York Fed president John Williams. Hope to talk to you again soon.
JOHN WILLIAMS: Stay well.