U.S. Sen. Pat Toomey (R-PA) is urging the Federal Reserve Board to pursue market reforms to increase illiquidity in the U.S. Treasury market.
In a letter to Fed Chair Jerome Powell, Toomey, the ranking member on the Senate Banking Committee, said he would rather see market reforms than the Fed purchase bonds.
“I strongly urge you to resist such intervention for at least two reasons. First, such action would undermine the Fed’s principal objective of fighting inflation, which continues to pose significant challenges for the U.S. economy. Second, it would repeat some of the mistakes of quantitative easing, such as obscuring the true cost and consequences of our mounting national debt,” Toomey said.
Instead, Toomey urged the Fed to pursue structural reforms, including the modification of the supplementary leverage ratio (SLR) and further analysis of “all-to-all” trading. These types of measures would ensure that the Treasury market functions smoothly, especially during times of stress.
Toomey pointed out that there has been a “notable deterioration in Treasury market liquidity” over the past year due to a variety of factors, including less accommodative monetary policy associated with elevated inflation. He adds that in the past few weeks, several measures of market liquidity have hit their lowest levels since the start of the pandemic in 2020.