MNI: Fed Should Set Tri-Party Repo As Benchmark Rate - Logan

The Federal Reserve should target the tri-party repo rate used in transactions between cash investors and large dealers as its benchmark overnight rate as market for the federal funds rate has become more fragile, Federal Reserve Bank of Dallas President Lorie Logan said Thursday. 

"While targeting fed funds currently provides effective control of broader monetary conditions, the connections are fragile and could break suddenly. The FOMC should take that risk off the table," she said in remarks prepared for a Richmond Fed conference in Richmond, Virginia. "The tri-party general collateral rate (TGCR) is cleaner, and I think it would currently offer the best target." 

The TGCR incorporates more than USD1 trillion a day in transactions, compared to just over USD100 billion for fed funds, she noted. It's calculated with a robust methodology and transmits well across money markets, she said.

Fed funds remains a viable target, giving a good gauge of broader monetary conditions and influencing broader monetary conditions. However, such "a concentrated market could abruptly grow more idiosyncratic," Logan said.

ORDERLY TRANSITION

Fed funds moves noticeably less than Treasury repo rates because its participants extend only to 11 federal home loan banks and a few bank borrowers, yet any stress that leads the lenders to pull back could quickly reach the entire market, Logan said. 

The regional bank crisis of March 2023 saw fed funds volume fell 64% in two business days as the federal home loan banks reduced fed funds investment in favor of commercial banks, she said. 

"The shift in private activity toward secured markets makes it very likely, in my view, that the target rate will eventually need to change. If the target rate must change, the best time for a change would be when markets are functioning smoothly and market participants can have plenty of advance notice," she said. 

"Proactively adopting TGCR as the target would allow for an orderly transition. The alternative, waiting for evidence that a change is urgent, could force a rapid switch in a more challenging environment."