Fed is 'finally on the road to normal' says top official Williams
Published on May 23, 2014 4:42 AM
SAN FRANCISCO (REUTERS) - After years of pulling out the stops to boost a stubbornly sluggish US economy, the Federal Reserve is moving back to "normal" monetary policy, a top Fed official said on Thursday.
But the Fed's super-easy monetary policy over the past five years has left the financial markets vulnerable, making the road to normalcy a tricky one to navigate, San Francisco Fed President John Williams said in remarks prepared for delivery to the Association of Trade and Forfaiting in the Americas.
"Financial market participants who are awash in liquidity may be ignoring or taking on outsize potential risks," he said. Though narrow interest spreads for risky assets like junk bonds and leveraged loans do not pose a significant threat in the near term, he said, they must be monitored closely.
A second challenge will be operational, he said: keeping control of short-term rates with bank reserves at many times normal levels. A variety of new tools, including a so-called reserve repo facility, should allow the Fed to manage the excess liquidity, he said.
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