(Bloomberg) -- A former top Federal Reserve official, who oversaw the U.S. central bank's trading desk, has warned that the type of actions taken so far to quell this week's turmoil in money markets may not be enough to keep conditions calm and fresh debt purchases may be needed.
Simon Potter, the former New York Fed executive, made the remarks during a conference call that Bank of America hosted for its clients, according to three people who listened.
Potter cautioned that policy makers may have to expand the central bank's balance sheet through outright purchases of U.S. Treasury securities, to ensure stable liquidity conditions at the end of the quarter as well as at year-end, said the people, who declined to be named because the call was private.
The recommendation follows a week of intense upheaval in money markets during which short-term interest rates spiked and pulled the Fed's policy benchmark rate outside its target range. It also goes beyond what the New York Fed has promised so far to keep the situation in check going forward.
A spokeswoman for the New York Fed declined to comment on Potter's remarks. Potter and Bank of America also declined to comment.
The reserve bank announced later Friday that it would offer so-called term repurchase agreements over the upcoming quarter-end, which would allow financial institutions to borrow cash from the Fed either overnight or for two-week periods, secured by Treasury collateral.
Read more: Inside New York Fed, Abrupt Ousters Shake Staff and Sink Morale
Potter was abruptly dismissed in May by New York Fed President John Williams, who assumed the top post at the bank in June 2018. The departure of Potter, a 21-year veteran of the institution, raised concerns about Williams -- a widely-respected monetary economist -- because of his relative lack of experience with financial markets. The New York Fed has yet to announce Potter's successor.
The New York Fed was forced to intervene in money markets with overnight cash loans for the first time in a decade on Tuesday, Wednesday, Thursday and Friday to contain short-term interest rates. Surges in the rate on overnight repo loans normally occur only at quarter-end and sometimes month-end.
QuickTake: The Repo Market's a Mess. (What's the Repo Market?)
This mid-month jump was attributed to a confluence of events that knocked cash reserves in the banking system out of balance with the volume of securities on dealer balance sheets: a corporate tax payment date, settlement of last week's Treasury auctions, and last week's bond-market sell-off, in which investors sold securities back to dealers.
From the beginning of last year to July, the Fed partially unwound the $4.5 trillion portfolio of bonds it had amassed in the years following the financial crisis. The reduction drained cash reserves from the banking system.
This week's turmoil raised questions about whether the Fed went too far in removing cash from the financial system, and focused attention on when the central bank would begin resuming balance-sheet expansion to keep pace with the needs of a growing economy.
“We're going to be very closely monitoring market developments and assessing their implications for the appropriate level of reserves and we're going to be assessing, you know, the question of when it will be appropriate to resume the organic growth of our balance sheet,” Fed Chair Jerome Powell told reporters Wednesday after the central bank cut interest rates for a second time this year.
“It is certainly possible that we will need to resume the organic growth of the balance sheet earlier than we thought,” Powell said.
To contact the reporters on this story: Matthew Boesler in New York at mboesler1@bloomberg.net;Alexandra Harris in New York at aharris48@bloomberg.net
To contact the editors responsible for this story: Margaret Collins at mcollins45@bloomberg.net, Alister Bull
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