Ex-Fed Officials: Fed should target repo rate to reduce market volatility

Two former US Federal Reserve (Fed) officials Brian Sack and Joseph Gagnon wrote in a blog published on Thursday, the Fed needs to use the repo rate to minimize the recent disruptive money market volatility that poses risks to the economy.

Key Quotes (via Reuters):

“Volatility in this market threatens the functioning of markets more broadly and could ultimately hurt the economy.” 

“A better approach is needed.”

“Not opposed to the Fed’s “floor system,” which it uses to set rates by paying interest on bank reserves.”

“The Fed should make changes to create a system that is more resilient and effective.”

The Fed should consider targeting the repo rate when setting policy instead of targeting the fed funds rate.”

The US dollar index rallied in the US last session after the Fed then said it would boost the size of its intervention in the repurchase, or repo, market to $100 billion overnight Thursday from $75 billion, while doubling the size of a two-week offering Thursday to $60 billion, per WSJ. 

The spot now trades back above the 99 handle, testing three-week tops, as markets look past the US political turmoil for the time being.