On an average day, over $ billion in Treasury securities changes hands, about seven times the value of stocks traded daily on the New York Stock Exchange. All of this trading activity serves the very important function of price discovery. More than any other securities market in the United States, the Treasury market responds forcefully to new information about macroeconomic fundamentals. The days when the most intense trading activity takes place are also the days when major reports are released on such indicators of U.S. economic performance as the employment report, the consumer price index or the producer price index. These releases allow market participants to digest important new information and to review their expectations about where the economy is going. The interest rates on Treasury securities of varying maturities are the market’s most important signals about the U.S. economy’s prospects for growth and risks of inflation. In the rest of the fixed-income market, trading in corporate bonds, mortgage-backed securities and sovereign debt also serves the price discovery process. This trading activity acts to differentiate, for example, a triple-A risk against a triple-B risk, the prepayment risk of mortgages against the prepayment risk of credit card receivables, and OECD country risk against emerging market risk.
At the end of the day, the flow of credit from securities markets has the same impact on our respective societies as that from banks. Therefore, central bankers have an obligation to understand the nature of these flows and the risks that they raise. Crucial to our obligations to our citizens is the need to be certain that these credit markets work smoothly and that credit flows efficiently from those most willing and able to bear the risks to those most able to put the funds to good use. This is as true for the United States as it is for any other country, developed or developing. Does this mean that central banks believe that capital markets should be supervised in the same ways banks are overseen? Clearly the answer to this question is no. This is not our role. In my view, central banks broadly have two main responsibilities with respect to the global debt markets. The first is to enhance the price discovery process by promoting transparency in their own actions. The second is to ensure that the banks, as providers of liquidity, perform their proper role in supporting the trading process by making sound credit decisions. In the United States, the Federal Open Market Committee or FOMC has a pronounced effect on the fixed-income market, both through its policy decisions and in the way the Federal Reserve conducts monetary policy. Indeed, an important part of the price discovery process is the anticipation of the Federal Reserve’s future actions.