Federal Reserve Bank of Dallas President Lorie Logan has suggested that the central bank modernize its approach to managing money market conditions. Logan proposes that the Fed shift its focus from targeting the federal funds lending market to managing liquidity to control the tri-party general collateral rate (TGCR). This change is technical and does not have implications for monetary policy broadly speaking. Logan believes that targeting the TGCR is the best option because it is a vibrant and active market, and the Fed’s existing tools already provide effective control of the rate.
The current system, which targets the federal funds rate, has become fragile and could break suddenly. The Fed’s balance sheet reduction and upcoming liquidity tightening at the end of the month may cause unexpected turbulence in money markets. Logan argues that the Fed should take this risk off the table by targeting the TGCR. This approach would allow for some movement in the rate and would not require pinpoint control.
Logan also rejects the idea of targeting the Fed’s administered rates, which guide the federal funds rate, as they will always be exactly what the Fed wants them to be, regardless of market conditions. She also notes that managing a rate based on a constellation of other money market rates is problematic. Instead, targeting the TGCR would provide a more effective and efficient way to achieve the Fed’s monetary policy objectives.
The proposed change is driven by the evolving nature of money market conditions, which are likely to force a shift at some point. Logan believes that it would be better to be ahead of the curve rather than being forced into action. She suggests that the best time for a change would be when markets are functioning smoothly and market participants can have plenty of advance notice. Overall, Logan’s proposal aims to improve the Fed’s ability to manage money market conditions and achieve its monetary policy objectives.