Target practice: Monetary policy implementation in a post-crisis environment

Traditionally, the Federal Reserve targeted the federal funds rate, expecting this rate to transmit a monetary policy stance to other short-term and longer-term rates. However, at the height of the financial crisis, the pass-through from the federal funds rate to other short-term rates deteriorated. Furthermore, market participants reportedly anticipate that the inception of liquidity requirements might weaken the federal funds market and therefore its linkages with other money markets. At the same time, however, most anticipate that high quality collateral repo markets should remain active. We argue that, in principle, instead of the federal funds rate, the Federal Reserve can target the Treasury General Collateral repurchase agreement rate, and explore the Federal Reserve’s capacity to do so empirically. Our results suggest that a target repo rate might be an alternative policy tool to the target federal funds rate in the post-crisis environment.