Every other central bank in the world has at some point shifted their monetary policy framework to the world of secured short-term funding rather than unsecured. That shows the primacy of repo as opposed to what has been used almost exclusively in the US (and related eurodollars). The Federal Reserve has discussed letting go of the federal funds target before, largely since there isn’t much volume since August 2007 in that venue.
Owing to the real emphasis of monetary policy, the FOMC remains committed to an outdated interest rate target that doesn’t have much of a direct impact on actual funding conditions. In other words, monetary policy is almost all psychology and thus since Americans are used to the federal funds target even if solely a communication tool then policymakers are not want to change at this important juncture. That may be an option down the road when the world is normalized, should we ever get there, but for now they are more worried about your potential confusion rather than rolling and even regular liquidity events.
Such a view overlooks these serious considerations about function, which, so far, the FOMC seeks plainly to ignore as comprehensively as possible. It tells you everything you need to know about monetary policy in the age of interest rate targeting and especially rational expectations theory. In the meeting minutes released so far, the platitudes about their rate “liftoff” “toolkit” are striking in how they match nothing of reality.
In January, for example, there was apparently discussion about both the Reverse Repo Program (RRP) and the Term Deposit Facility (TDF) without mention of the slightest about how neither have made any impact in any actually important funding market.
With regard to the appropriate setting of the cap for ON RRP operations at the beginning of normalization, the staff reported that testing to date suggested that ON RRP operations have generally been successful in establishing a floor on the level of the federal funds effective rate and other short-term interest rates, as long as market participants judge that the aggregate cap is quite unlikely to bind. Against this backdrop, most meeting participants indicated that a sizable ON RRP cap would be appropriate to support policy implementation at the time of liftoff, and a couple of participants suggested that the aggregate cap might be suspended for a time.
Given the persistence of repo fails, it is hard to take such an assertion as anything other than grandstanding propaganda. Since June 2014, the repo market has been captured in an apparently durable mode of disarray, to which the reverse repo program was designed specifically to counter! In other words, had it actually been “establishing a floor on the level of …other short-term interest rates” there would be some correlation between RRP and fails. Or, actually, success would not be much by way of fails, instead surging RRP usage leading to far more flaccid and acceptable repo existence.
Instead, the outcomes are apparently reversed as the RRP remains limp while repo fails bely any notion of a rate floor outside of the irrelevant federal funds target. In other words, the persistence of the federal funds rate as the central axis of policy communication and intent is itself intentionally misleading and disingenuous. The FOMC is saying, literally, that as long as the federal funds rate behaves then policy is being received as successful by the general public regardless of actual function and condition.
We can extend that view to the TDF as well, since there is no resemblance between its testing parameters and GCF repo rates. In fact, if there is an interpretation to be made it would rather tend in the “wrong” direction, as repo rates seem to be inversely correlated to high rates of TDF allotments.
That would be odd and counterproductive to say the least, especially since the effective rate of the last TDF (tuned to the end of February) went off at IOER + 3 bps. If the TDF were at all effective, repo rates should have risen, not fell. I don’t actually think there is a relationship here, inverse or not, but that is precisely the point – that the FOMC cannot claim, by real world function, that the TDF has been successful since at the very least repo rates have behaved contrariwise.
To most people this is all arcane mechanics of an esoteric system that doesn’t easily lend itself to casual observation and interpretation. Regardless, this is vitally important and it is exactly that ignorance that the FOMC’s continued emphasis on the federal funds rate depends. As long as the public feels the Fed retains “enough” control with an irrelevant liquidity measure, policymakers don’t think it much matters about real liquidity. That ridiculous theory may change with time, though not likely in the manner in which they are planning.
Modern monetary policy is itself a misnomer because it has little to with “money” or even actual operational existence. It is instead entirely revolved around communicative properties of emotional constraints and intended manipulation. That its central focus relates still to the extended financial price of risk in its real forms and functions is way beyond, now, even most criticisms of fiat money. And economists wonder where all the wage growth went.