Fed's Logan calls for overhaul of central bank rate control toolkit

Core Viewpoint - The Federal Reserve Bank of Dallas President Lorie Logan advocates for modernizing the management of money market conditions to better achieve monetary policy objectives, suggesting a shift from targeting the federal funds lending market to managing liquidity to control the tri-party general collateral rate (TGCR) [1][2][3] Group 1: Proposed Changes - Logan emphasizes the need for the Federal Open Market Committee to prepare to target a different short-term interest rate, specifically the TGCR, which is more active and manageable with existing tools [2][3] - The current practice of targeting the federal funds rate is deemed fragile, with potential risks that could disrupt monetary conditions, prompting the need for reform [3] Group 2: Current Monetary Conditions - The Federal Reserve's current federal funds rate is set between 4% and 4.25% following a recent quarter percentage point cut, with the rate influenced by two other rates that manage bank reserves and money market funds [6] - The federal funds market has become less active due to the Fed's extensive provision of reserves during the financial crisis and the COVID-19 pandemic, complicating the management of monetary policy [7] Group 3: Future Challenges - The Fed is expected to face challenges in maintaining its interest rate target as liquidity conditions may tighten, leading to increased cash flow into Fed liquidity facilities [4] - The ongoing reduction of the Fed's balance sheet could introduce unexpected volatility in money markets, further complicating the monetary landscape [5]