FRB Vice Chair for Supervision Describes "Dash for Cash" after COVID-19
Commentary by Steven Lofchie
Federal Reserve Board of Governors Vice Chair for Supervision Randal Quarles, described market reaction to COVID-19.
At the Institute of International Finance, Mr. Quarles stated that before the COVID-19 event unfolded, the U.S. economy was "in vibrant good health," as measured by economic metrics such as output growth and unemployment. He described the World Health Organization's declaration of COVID-19 as a global pandemic as a trigger that led to "a historically unprecedented dash for cash." Among the consequences of that "dash," reported Mr. Quarles, were (i) a "pullback" from the commercial paper markets, (ii) large redemptions from prime and tax-exempt money market funds, and (iii) redemptions from corporate bond funds. Mr. Quarles pointed out that the most surprising development was the strain in the Treasury market. Mr. Quarles explained that during times of financial stress, Treasury prices typically rise, but with the COVID event, Treasury prices fell.
Despite the severe stresses, the market stabilized quickly, which Mr. Quarles attributed to the "muscular intervention" of the Federal Reserve. He concluded that the COVID event exposed vulnerabilities that suggest a need for further reform, particularly regarding the regulation of short-term funding.
Commentary
The Vice-Chair's statement follows closely on a report issued by the SEC which likewise concluded that the economy would have suffered far greater damage were it not for intervention by the Federal Reserve.
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