Fed Official Says Market Turmoil Triggered by Covid-19 Revealed Fragile Nonbank System

In March, as governments around the world shut down swaths of the global economy to slow the spread of the novel coronavirus, investor panic caused widespread turmoil in financial markets. That prompted a blitz of measures by the Fed and other central banks to keep credit flowing through the economy as investors and financial firms scrambled to preserve cash.

Among the Fed’s initiatives were programs to provide liquidity to money-market mutual funds, which large and small investors often use instead of bank accounts to park cash, and commercial-paper markets, which companies routinely tap for short-term loans.

“We know already that work needs to be done to improve the resiliency of money market funds before the vulnerabilities in these funds amplify another shock,” Mr. Quarles said Tuesday in the text of his speech to the Securities Industry and Financial Markets Association. “This will require careful consideration of financial stability, investor protection, and efficiency objectives alongside an understanding of the benefits of money market funds that should be preserved.”

Write to Paul Kiernan at [email protected]