Fed Debuts Interest-Rate Plan B as Longtime Benchmark Fades

Tue, March 01, 2016


After eight years of unprecedented intervention in financial markets, the Federal Reserve has taken the first baby steps in a long-term mission to extract itself. But it’s good to have a backup plan just in case that doesn’t work out.

That’s one way to look at the new “overnight bank funding rate” the New York Fed unveiled Wednesday. The rate is intended to shore up the calculation that comprises the federal funds rate, a once-robust gauge of inter-bank borrowing costs that serves as the U.S. central bank’s monetary policy target, but has lost its significance as a barometer of underlying economic activity since the 2008 financial crisis.

...“There are lots of paths the money markets and the Fed together could go down, and there are enough where it would be very nice to have a spare reference rate on the shelf that this is a very worthwhile endeavor,” said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey. “As to whether or not fed funds do ever come unhinged, that’s hard to say. It’s not impossible, but it’s certainly not inevitable.”