Federal Reserve Logan: The Federal Reserve should abandon the federal funds rate and use Treasury bonds as collateral for overnight rates

The Federal Reserve should move away from using the federal funds rate as a benchmark for conducting monetary policy and instead consider an overnight rate tied to the more robust US Treasury collateral lending market, according to Dallas Federal Reserve President Logan. Logan argued that the federal funds rate target was outdated and that the little-used interbank market had a fragile link with the overnight money market that could suddenly break. She said updating the Fed's mechanism for conducting monetary policy would be part of an efficient and effective central banking system. "One could argue that there is no need to act now that everything is normal," Logan said. But if the transmission mechanism between the federal funds rate and other money markets fails, we will need to quickly find alternative targets, and I don't think making important decisions under time pressure is the best way to promote a strong economy and financial system. "She said the tri-party general guaranteed rate (TGCR) could bring the most benefits. Logan pointed out that the TGCR covers more than $1 trillion a day of transactions, so changes can be effectively transmitted in money markets. The federal funds market currently averages less than $100 billion in transactions.