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Large shifts in monetary policy lead to financial vulnerabilities: New York Fed head

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NEW YORK, NY: New York Stock Exchange (NYSE) trading floor is seen in Manhattan, New York City, United States on October 25, 2021. (Tayfun Coşkun - Anadolu Agency)
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Nov 17, 2022 - 02:16 AM

ANKARA (AA) – The president of the US Federal Reserve Bank of New York said Wednesday that large and rapid shifts in monetary policy may contribute to stresses and expose vulnerabilities in global financial markets.

“Investors and financial institutions need to adjust to a rapidly changing and highly uncertain environment. And heightened uncertainty can add to market volatility, resulting in diminished market liquidity,” John Williams said at the 2022 Treasury Market Conference in New York.

Williams said monetary policy influences the economy by affecting financial conditions, with the Treasury market at the center.

“For monetary policy to be most effective, financial markets must function properly. If the Treasury market isn’t functioning well, it can impede the transmission of monetary policy to the economy,” he said.

The New York Fed head noted that central banks have been taking strong and decisive actions to restore price stability to fight inflation.

The Fed raised US interest rates by 75 basis points Nov. 2 for a fourth consecutive time, raising the target range for the federal funds rate to between 3.75% and 4% — its highest since January 2008.

While the central bank has raised its benchmark interest rate by a total of 375 basis points, or 3.75%, since March to get control of runaway inflation, there has been a significant downfall in financial markets with many US stocks plummeting, especially in the tech industry, due to lower liquidity and a lack of investment.

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