Federal Reserve Bank of Dallas president Lorie Logan has suggested the US central bank should discontinue using the federal funds rate as its benchmark for implementing monetary policy. Logan proposed considering an overnight rate tied to the more robust market for loans collateralised by US Treasuries. The suggestion was made on Thursday at an event at the Richmond Fed. Logan argued that the current fed funds target is outdated, and connections between the interbank market and overnight money markets are fragile and could break down unexpectedly. She said that updating the mechanisms by which the Fed implements monetary policy would be a part of efficient and effective central banking.
Logan stated that while the current system appears to be functioning adequately, a contingency plan is necessary. If the transmission between fed funds and other money markets were to fail, a replacement target would be needed swiftly. She cautioned against making critical decisions under pressure, as this could undermine efforts to foster a strong economy and financial system. Before assuming her role at the Dallas Fed in 2022, Logan spent two decades at the New York Fed’s markets desk, eventually managing the central bank’s balance sheet.
Logan proposed several ways the Fed could maintain interest rates within their prescribed range. She highlighted the tri-party general collateral rate, or TGCR, as potentially offering the most benefits. The TGCR is one of three rates linked to overnight repurchase agreements, along with the Secured Overnight Financing Rate, and is overseen by the New York Fed. Market participants have suggested the TGCR would be an ideal replacement for the fed funds rate, as it represents a more robust lending market.
