William C Dudley: Market and funding liquidity – an overview Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Federal Reserve Bank of Atlanta 2016 Financial Markets Conference, Fernandina Beach, Florida, 1 May 2016. *  *  *  Accompanying charts can be found on the Federal Reserve Bank of New York’s website. It is a pleasure to have the opportunity to participate in the Federal Reserve Bank of Atlanta’s 21st Annual Financial Markets Conference. This year’s topic, focusing on the connection between liquidity and financial stability, is an excellent one. As the first speaker, I thought it would be useful to lay out what I see as some of the key issues. I may raise more questions than provide answers, but, hopefully, my remarks will help to stimulate our discussion and debate over the next two days. As I see it, in the context of our financial system there are two distinct types of liquidity. The first is what is typically referred to as market liquidity. I would define market liquidity as the cost – both in expense and time – of buying or selling an asset for cash.
For this reason, we have adopted a broader-based approach, taking into account all relevant data. We have thus based our monetary policy on two “pillars”. In view of the monetary origins of inflation in the medium term, we have assigned a key role to the monetary aggregate M3, which constitutes the first “pillar” of our monetary policy strategy. This pillar is based on a reference value which we set at 4.5% for the annual growth rate of the broad monetary aggregate M3. This monetary indicator is regarded as being the most compatible with medium-term price stability. Last December, we confirmed this 4.5% growth rate for M3. The concept of a reference value does not imply a commitment on the part of the Eurosystem to automatically correct deviations in monetary growth in the short term. The reference value of M3 is consistent with lasting price stability. Naturally, we also follow the counterparts of M3 closely, that is to say the sources of money creation, and especially lending to the economy and capital flows with the rest of the world. However, trends in monetary aggregates are not in themselves sufficient for assessing the risks to price stability. This is why we need an exhaustive description of the prevailing economic and financial situation. The second pillar of the monetary policy strategy is based on a broad range of variables acting as leading indicators of the outlook for euro area price developments.