MNI INTERVIEW: Market Rout Not a Financial Event-Adrian

Turmoil in global markets this month, including a slump in the dollar and a spike in Treasury yields, does not amount to the kind of financial shock that is likely to generate a crisis or to a sign that the U.S. currency is losing its reserve status, top IMF official Tobias Adrian told MNI. 

“We are not in the midst of a financial stability event,” he said in an interview at the Fund’s headquarters in Washington as this week’s Spring Meeting gets under way.  

Instead, financial markets are merely catching up to a high level of policy uncertainty that has been looming for some time, said Adrian, IMF Financial Counsellor and Director of the Monetary and Capital Markets Department

“We have seen a repricing and we have seen heightened uncertainty, but we haven’t seen institutional distress or disorderly market conditions,” he said.

RESERVE CURRENCY

The dollar’s status as the world’s reserve currency is not under question despite recent worries that dollar selling and rising yields in a risk-off environment represent a broader shift by institutional and sovereign investors away from U.S. assets, Adrian added. 

“The U.S. Treasury market remains the most important benchmark and asset underlying global capital markets. We don't think that there's any question around that,” he said.

“The U.S. Treasury market is the largest reserve asset in the world, 50% of the world’s reserves are in U.S. dollars so market functioning in the U.S. Treasury market is very important,” he added, citing steps like central clearing and greater transparency in cash and repo markets as movements in the right direction.   

FLOW REVERSAL

Rather than a more secular shift, the short-term selling in U.S. assets likely represents a reversal of years of strong flows into dollars. 

“Much of what we've seen last month is really more repricing rather than dramatic flows,” said Adrian, also a former senior staffer at the Federal Reserve Bank of New York.

“We have seen some flows out of some countries, but then you know, other countries have actually increased exposure, so overall, the relative flows into the U.S. are fairly minor and against the backdrop of these very, very large inflows over many months and years, we wouldn't want to overemphasize those price moves.”

Adrian sees the Trump administration’s new tariff regime as primarily a macroeconomic shock rather than a hit to financial stability. 

“We think that financial stability is primarily determined by the regulatory approach and then the ability of central banks globally to provide liquidity if needed. From that vantage point, the financial stability picture is sound,” he said. 

“The tariffs are a supply shock primarily for the U.S. and a demand shock for the rest of the world. Of course there’s also the high uncertainty that does translate into lower aggregate demand.”

Adrian said inflation expectations have remained fairly well-anchored, a testament to the credibility of inflation-targeting central banks like the Fed. Still, his own Global Financial Stability Report notes the picture is becoming less comfortable for FOMC members. 

“Inflation expectations over the near- to medium-term have risen meaningfully in recent months, suggesting a challenging trade-off faced by the Federal Reserve in lowering inflation pressures and buttressing a slowing economy,” the report said.