Federal Reserve's Logan Warns of Vulnerability in Growing Treasury Arbitrage Trading

Investing.com – Dallas Federal Reserve President Lorie Logan expressed concern on Tuesday at the Futures Industry Association conference in Austin, Texas, about the rapid expansion of Treasury arbitrage trading and its potential risks during market stress events.

Logan described the growth of this arbitrage trading strategy over the past year as “stunning.” Treasury arbitrage involves hedge funds taking highly leveraged bets on small price differences between cash bonds and futures.

“If a stress event occurs, there is indeed vulnerability,” Logan warned, emphasizing the potential risks of rapid deleveraging. She stressed that institutions involved in these trades need “very strong risk management” and greater transparency.

Logan also highlighted the importance of completing Treasury resilience reforms by the official sector, calling this work “crucial.”

During her speech, Logan also discussed other economic topics, including the impact of artificial intelligence on the economy. She noted that while AI data centers have high electricity demands, “it’s not as large as people imagine.” Logan warned that if productivity gains from AI are delayed beyond expectations, the economy could experience more overheating.

Regarding monetary policy, Logan affirmed the Federal Reserve’s independence, stating that “short-term politics” are not part of the Fed’s data set when determining interest rates. She expressed hope that the central bank’s independence will remain “fundamental” in the coming years.

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