By Jason Galanis
Wall Street has expressed its concern over raising interest rates in the USA, fearing that the bond markets may not be capable of absorbing the rise. The Federal Reserve is acting to downplay these concerns, stating that Wall Street’s claims are exaggerated.
Wall Street is worried that the raising rates of interest planned by the federal government could cause a sell-off within the U.S. bond market, which would only be worsened by investors being unwilling to buy in to the unstable and volatile market. The U.S. banks who have acted as the market makers for the treasuries have cut bond inventories as a measure to respond to stricter requirements set in capital. This has led to a reduction in the liquidity buffer that was in place in the fixed income market.
However, the Federal Reserve have dismissed the accusations made by Wall Street that their capital rules have been the cause of the bond market’s propensity to fail under stressful conditions. The response from the Federal Reserve has been that it is up to banks, investors, and funds to forecast outcomes and protect themselves. The Federal Reserve has recently come under fire from the Republican party, who have pressured them to acknowledge that their newly introduced rules were responsible for the destabilization of markets. They have responded by stating that less liquidity is an expected byproduct of changing regulations and preparation for an economy which will be hit by more conservative financial policies.
Investors have identified a number of factors that will affect market vulnerability, such as the federal reserve holding a greater number of bonds than primary dealers and a burgeoning reliance upon high-frequency trading. All of these factors have led to a 60% rise in market volatility since mid-way through 2015.