The Fed funds market is a flawed policy benchmark because it's small, concentrated, and dominated by foreign banks borrowing for arbitrage rather than genuine liquidity needs. This makes it a poor indicator of true funding conditions across the broader financial system.
Unlike September 2019, the recent corporate tax day saw no funding crisis. The mere existence of the Fed's Standing Repo Facility (SRF) calmed markets, preventing panic. This psychological backstop, combined with higher bank reserves and a better regulatory environment, proved crucial for stability.
The recent uptick in the Fed funds rate was not a direct signal of scarce bank reserves. Instead, it was driven by its primary lenders, Federal Home Loan Banks, shifting their cash to the higher-yielding repo market. This supply-side shift forced borrowers in the Fed funds market to pay more.
If the Fed adopts a repo rate like TGCR as its policy benchmark, its Standing Repo Facility (SRF) must evolve. It would shift from being a passive emergency backstop to an active tool for daily rate management, similar to how the Fed's RRP and IORB rates currently operate.