Treasury market liquidity crunch could derail the Federal Reserve's policy, New York Fed chief says

• Dysfunctioning US bond markets run the risk of undermining central bank monetary policy, according to John Williams.
• The New York Federal Reserve president told a conference the financial system must be strengthened.

Dysfunctioning US bond markets run the risk of undermining central bank monetary policy, according to New York Federal Reserve President John Williams.

While speaking Wednesday at conference hosted by the New York Fed about the Treasury market, he reiterated the Fed's priority to stay aggressive in its efforts to tame inflation and find ways to strengthen the financial system in the process.

"For monetary policy to be most effective, financial markets must function properly," Williams said, according to the Financial Times. "Monetary policy influences the economy by affecting financial conditions, with the Treasury market at the center of it all. If the Treasury market isn't functioning well, it can impede the transmission of monetary policy to the economy."

Williams' comments come as a liquidity crunch takes hold of the $24 trillion Treasury market and threatens to grind the world's most vital bond market to a halt.

Bond yields have seen big swings as a lack of liquidity has widened the price gaps between investors buying and selling Treasuries. That means trades that didn't move the market before are now creating more volatility.

And big institutions are less inclined to serve as Treasury market-makers, as the so-called supplementary leverage ratio requires them to put up more capital and boost their reserves.

Treasury Secretary Janet Yellen acknowledged last month the possibility of buybacks after her department surveyed dealers of Treasuries about a potential program.

At the conference Wednesday, Nellie Liang, the under secretary of domestic finance at the Treasury Department, proposed new transparency measures on the most widely traded Treasury bonds to improve investor confidence and help regulators spot squeezes earlier.