When the Fed Speaks With One Voice, We Should Listen
Posted at 1 p.m. on Feb. 22
The 12 presidents of the regional Federal Reserve Banks recently wrote a letter to the Financial Stability Oversight Council calling for reforms to the rules governing money market mutual funds. Simon Johnson explains the significance and content of the letter.
“As far as I have been able to determine, the comment letter…was literally the first time these 12 organizations have spoken with one public voice without involving the Fed’s Board of Governors.”
“Money-market funds operate in some ways like banks – their liabilities are regarded by investors to be just like bank deposits when times are good. But when times are scary…there can be rapid and destabilizing runs by investors out of the funds.”
“There are some nuances on the details, but the most important idea is to…eliminate the illusion that these investment products necessarily have a stable value… this reality is currently masked from investors… You might also want equity buffers at money-market funds, and the Fed presidents bring this up as a possibility.”