Dallas Fed President: "Fed Should Shift Benchmark Rate to Ultra-Short-Term Treasury-Backed Rate"

Logan: "Sharp Decline in Federal Funds Rate Trading Volume"
"Repo Market Tops $1 Trillion Daily...Need to Shift to TGCR"

Lorie Logan, President of the Federal Reserve Bank of Dallas, argued that the U.S. central bank should replace the federal funds rate, which has long served as the benchmark for monetary policy, with an ultra-short-term interest rate backed by U.S. Treasury securities.

Speaking at a Richmond Federal Reserve event on this day, President Logan stated, "The time has come for the Federal Open Market Committee (FOMC) to be prepared to target a different short-term interest rate."

She explained that instead of the federal funds rate, which is currently used as the Fed's policy rate, consideration should be given to the overnight ultra-short-term repurchase agreement (repo) rate backed by U.S. Treasury securities.

The federal funds rate is the interest rate applied when banks borrow funds overnight, and it used to have a significant impact across the financial markets. However, following the global financial crisis and the COVID-19 pandemic, bank liquidity has surged, causing the volume of transactions to plummet to less than $100 billion per day. In contrast, the repo market backed by Treasury securities now exceeds $1 trillion in daily transaction volume and operates on a much larger and more active scale.

President Logan warned, "If the flow of funds between the federal funds rate and other financial markets is severed, we must quickly find an alternative," adding, "Making important decisions under time pressure is not the best way to support a robust economy and financial system."

She specifically suggested that the Tri-Party General Collateral Rate (TGCR), calculated by the Federal Reserve Bank of New York, could serve as an alternative to the current federal funds rate. The TGCR is an interest rate derived from ultra-short-term lending transactions backed by Treasury collateral and is one of three indicators managed by the New York Fed. Along with the widely used Secured Overnight Financing Rate (SOFR), it is regarded among market participants as one of the most reliable benchmarks.