David Paul Morris/BloombergThe Treasury market’s liquidity problems have the potential to interfere with the Federal Reserve’s ability to transmit monetary policy to the economy, according to John Williams, president of the Federal Reserve Bank of New York.Speaking at the 2022 U.S. Treasury Market Conference on Wednesday, Williams told attendees that a well-functioning Treasury market is critical for the U.S. economy and the world. He also said that price stability is a “must-have” for the central bank and that the Treasury market “is at the center of it all,” so the “time is now” to find ways to strengthen core parts of financial system. “If the Treasury market isn’t functioning well, it can impede the transmission of monetary policy to the economy,” he said. The almost $24 trillion Treasury market is the world’s deepest and most liquid securities market, and provides the benchmark levels at which interest rates are set across the U.S. economy. By hiking interest rates aggressively to arrest inflation, policy makers are trying to tighten financial conditions and slow the economy down. See also: More trouble is brewing in the $24 trillion Treasury market: This time, it’s about central clearingLiquidity concerns have plagued the market for months, and the Fed confirmed those fears earlier this month in its financial stability report. The remarks by Williams came as one of the bond market’s most popular recession gauges shrank to its most negative level in more than 40 years on Wednesday, in a worrisome sign about the outlook. The inversion was driven primarily by a steep drop in the 10-year yield, BX:TMUBMUSD10Y which fell 10.5 basis points to 3.693%.
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