Bloomberg on "Death of Fed Funds"
Bloomberg writes on "The Death of Fed Funds?" The article says, "The debate to replace the Federal Reserve's key interest rate has begun. Spurred by declining volumes and the dominance of a few participants in the market for fed funds, the central bank has started discussing potential alternative policy benchmarks as it seeks firmer control over the nation’s short-term interest rates.... Federal Open Market Committee members brought up two potential alternatives at last month's meeting, and they could hardly be more different. What's more, some strategists say a policy-targeting pivot could come as soon as next year." They quote Bank of America Corp.'s Mark Cabana, "The Fed knows that fed funds is flawed.... It's probably fatally flawed in their mind, and in the market's mind." It's possible to have a new rate by the end of 2019.... The way the Fed will likely do this is if they are targeting a range of money-market rates and looking at fed funds, OBFR and secured funding rates to make a determination of policy. It won't be as specific to fed funds." Bloomberg continues, "Not everyone agrees. Despite its flaws, fed funds is likely to remain the central bank's preferred rate for now, given OBFR's limitations and the dramatic changes to Fed communication that would be necessary to transition to a repo-based rate, according to Barclays Plc strategist Joseph Abate." Abate says, "The Fed is tied to the funds rate now as the funds rate is first of all seen as a measure of liquidity, and more importantly pressure in the rate is seen as an indication of the Fed's future policy path.... If that doesn't change, then -- and this is a philosophical question -- does it matter that there is volume underneath it? It hasn't mattered up until now because there is volume."
