NY Fed Potter: Confident Fed Able to Raise Int Rates When Need
By Sheila Mullan
NEW YORK (MNI) - New York Federal Reserve Bank Executive Vice President Simon Potter Tuesday evening said he is "pretty confident" that the central bank has the ability to raise rates to normalize market conditions once the economy returns to normal.
Taking questions after addressing students at NYU's Stern School of Business, Potter -- who is head of the Markets group at the New York Fed and the manager of the System Open Market Account -- noted that the market's worries about the Fed's unwind of its quantitative easing measures "have changed recently."
"W have many ways of measuring" how the market will react to higher rates, said Potter in a response to a question on the Fed normalizing conditions. He noted that the Fed's reverse repos, tested in the Open Market System, will "drag money" out of the banking system that the Fed injected through its monetary stimulus measures.
The Fed can also via interest on excess reserves or IOER "increase rates on short-term reserves," he added and control the financial conditions with the larger balance sheet.
Potter noted the Fed expends effort to "see whether we are lined up with what the market thinks," such as through primary dealer surveys.
"Interest rates are now very, very low," which poses an interest rate risk for market participants, he added, but Operation Twist has removed some of that risk as the Fed has bought the longer-term Treasuries.
He noted that "until the U.S. labor market is functioning" as it did pre-crisis, the U.S. population "won't have the earnings labor wealth" that it used to.
He also added that tighter regulations such as Dodd Frank have affected how the Fed does its crisis-repair work and rules now mean that the Treasury Secretary must be involved in the creation of any Maiden Lane type plan.
Potter noted that the Fed's MBS buying "really drove that primary rate down" in mortgage lending rates and added that buying MBS, as compared to buying U.S. Treasuries, "is a lot more complicated.
He said the New York Fed's process of choosing private sector asset managers has improved and the the Fed is "happy" with such managers now. He noted that the Fed has "invested a tremendous amount of time" to consider what is the proper haircuts for the triparty repo on the various asset classes.
On the non-traditional financial sector, Potter said he does not think thereare dangers within the U.S. shadow banking system now due tyo tighter regulation, but did worry that "there could be a danger" from foreign banking events that wash over onto U.S. markets.
"There will never be an early warning" of a financial crisis," he added, but the Financial Stability Oversight Council and other entities provide "better" chances of anticipating problems.
He added that the Fed staff is also "trying to think through what could be wrong with the models and explanations for market vulnerabilities."
--MNI New York Bureau; tel: +1 212-669-6432; email: smullan@mni-
news.com
---
Derivatives Market: CFTC To Appeal Ruling Rejecting Dodd-Frank Trading Limits