Item 1 of 2 Federal Reserve Bank of Dallas President Lorie Logan attends an event with the Borderplex Alliance in El Paso, Texas, U.S., May 30 2024. REUTERS\/Ann Saphir<\/p>\n
[1\/2]Federal Reserve Bank of Dallas President Lorie Logan attends an event with the Borderplex Alliance in El Paso, Texas, U.S., May 30 2024. REUTERS\/Ann Saphir Purchase Licensing Rights, opens new tab<\/a>Dallas Fed warns federal funds rate losing its potencyTri-party general collateral rate works better to transmit monetary policyDallas Fed paper comes as bank leader Logan argues for reform<\/p>\n NEW YORK, Dec 16 (Reuters) – New research from the Federal Reserve Bank of Dallas is building the case for a change in the interest rate the central bank targets to achieve its monetary policy goals.<\/p>\n In a paper, opens new tab<\/a> released Tuesday, Sam Schulhofer-Wohl, who serves as senior advisor to Dallas Fed president Lorie Logan, says that the tri-party general collateral rate, or TGCR, works better as a tool of monetary policy transmission compared to the federal funds rate.<\/p>\n Sign up here.<\/a><\/p>\n The paper\u2019s findings follow a recent speech, opens new tab<\/a> by Logan, which argued that the Fed should shift toward targeting the TGCR over the federal funds rate, as it is a better barometer of real world short-term borrowing costs.<\/p>\n Schulhofer-Wohl said in the paper that the ability of changes in the federal funds rate to influence broader borrowing costs \u201chas deteriorated in recent months,\u201d while not breaking down completely. He added, \u201ctransmission of TGCR deteriorated less than transmission of [effective fed funds rate, or EFFR] in the episodes during 2018 through 2020 and has weakened only modestly in recent months, much less so than EFFR.\u201d<\/p>\n For decades, the Fed has sought to achieve its congressionally mandated goals of keeping inflation low and stable and job growth as strong as it can be through changes in the federal funds rate, which is what banks charge one another to borrow reserves.<\/p>\n But changes in monetary policy, most notably by way of using large-scale bond buying as a monetary policy supplement, have flooded<\/a> the financial system and rendered the federal funds market a low-volume backwater relative to other money market sectors.<\/p>\n Despite the funds rate\u2019s vestigial status the Fed has continued to target it because some key central bankers have noted that it continues to move in sync with other money market rates, and as a result, it remains a meaningful influence on other money market rates.<\/p>\n NEW REGIME?<\/p>\n Logan warned in her September speech that status quo is unlikely to last. \u201cWhile 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.\u201d<\/p>\n Of the rates the Fed could target in place of the funds rate, the TGCR is the \u201cbest\u201d option due to that market\u2019s active status, and due to the fact that \u201cthe Fed\u2019s existing tools already provide effective control\u201d of the rate, Logan said then.<\/p>\n Any change in the interest rate targeted by the Fed is technical and stands aside from broader debates on the rate-setting Federal Open Market Committee about where short-term borrowing costs should be. That said, it is important that the Fed be able to reliably influence borrowing costs and that\u2019s driving the debate over appropriate targets.<\/p>\n There\u2019s little sense the Fed will shift the rate it targets soon, and some observers say the topic is a back-burner issue unlikely to be taken up by Fed Chair Jerome Powell, whose term ends next May.<\/p>\n Reporting by Michael S. Derby Our Standards: The Thomson Reuters Trust Principles., opens new tab<\/a><\/p>\n
\nEditing by Nick Zieminski<\/p>\n