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The Fed: Comparing Treasurys to pumpkins, Fed’s Waller dismisses concerns about bond-market liquidity

Fed Governor Christopher Waller doesn’t have time for complaints that liquidity in the most important financial market –U.S. Treasury securities — isn’t deep enough.

According to a transcript of a question-and-answer sesssion after his Thursday speech, posted by Wall Street Journal reporter Nick Timiraos, Waller made the point that bank usage of the reverse repo facility results in them handing the Fed trillions of dollars worth of securities every day.

“The markets are handing us $2.2 trillion worth of liquidity that they don’t need,” he said. “So I have a hard believing that I need to step in and do something on liquidity concerns when there’s $2.2 trillion they can take back at [any] time they want and redistribute.”

When people say the Treasury market isn’t liquid, it means “people aren’t willing to pay the price that you’re selling at. Okay, well, lower the price.” And if people aren’t willing to lower the price, that means they’re happy to hold the security.

He joked that on Oct. 31, the liquidity for pumpkins is very high, but on Nov. 1 the market liquidity goes to zero. “But I’m not going to step in and try to fix the pumpkin market,” he said.

Other officials have been more concerned. The Office of Financial Research earlier this year pointed out the market is dependent on a small pool of dealers who may become constrained during times of crises, and reliance on market-based financing also can exacerbate stress.

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