Market Insight – October 2025: The Federal Reserve’s next evolution may begin in the repo market. Shifting its policy anchor from the outdated federal funds rate to the tri-party general collateral rate (TGCR) could modernize monetary policy and strengthen transmission across U.S. interest rate and credit markets.
In a speech delivered on September 25, 2025, Dallas Fed President Lorie Logan made a compelling case for modernizing the Federal Reserve’s operating target. She argued that the central bank should consider shifting its benchmark rate from the federal funds rate to a broad general collateral repo rate, specifically the tri-party general collateral rate (TGCR). This recommendation, rooted in the structural evolution of short-term funding markets, offers a forward-looking response to an outdated policy anchor. This report supports President Logan’s proposition by outlining the strongest reasons for such a transition, identifying a few associated risks, and discussing implications for SOFR, AXI, and FXI.
Three Good Reasons for the Shift
1. Alignment with Modern Market Structure
The most compelling rationale is the mismatch between the current policy anchor—the federal funds rate—and today’s money market realities. The fed funds market, once a central part of short-term interbank lending, has shrunk dramatically in both volume and importance. It is now largely a niche market dominated by a narrow set of participants, including government-sponsored enterprises (GSEs) and foreign banks.
Meanwhile, the repo market for US Treasuries, especially tri-party repo transactions, has become the dominant venue for short-term funding. Volumes in the TGCR segment exceed $1 trillion daily, dwarfing activity in the fed funds market. Shifting the operating target to TGCR would more accurately reflect the marginal cost of overnight funds and better capture the prevailing dynamics of U.S. money markets.
“The most compelling rationale is the mismatch between the current policy anchor—the federal funds rate—and today’s money market realities.”– Alex Roever, CFA
2. Improved Policy Transmission and Operational Robustness
A TGCR-based target would enhance the Fed’s control over short-term rates through more direct and efficient operational tools. The Federal Reserve already influences repo rates through its Standing Repo Facility, reverse repo operations, and other market instruments. Using a repo rate as the policy anchor would simplify the transmission mechanism, as the Fed can directly impact repo market conditions. Furthermore, Logan notes that the fed funds market has fragile linkages to broader financial markets, which could break during stress. By contrast, the repo market, especially the tri-party segment, is broader, deeper, and more resilient. This would reduce the risk of sudden dislocations or policy miscommunication during periods of market stress.
3. Preemptive Stability and Evolutionary Continuity
The third major advantage of shifting to TGCR is the opportunity to modernize in a proactive and orderly fashion. Historical precedent shows that the Federal Reserve has adapted its operating frameworks over time. Waiting for market stress or dysfunction in the fed funds market could force a reactive and potentially disorderly transition. Logan rightly argues that making this change in a calm, stable environment allows the Fed to manage the shift gradually, provide clear guidance, and align its tools without triggering market disruption. Moreover, it affirms the Fed’s ability to evolve with market structure while maintaining continuity in policy stance and communication.
Downside Risks and Challenges
1. Operational and Communication Complexity
Shifting the policy target from the federal funds rate to TGCR would entail significant logistical and communication efforts. Market participants, including banks, funds, and regulators, are accustomed to the fed funds framework. Reorienting expectations, contracts, and operational systems will require careful planning and clear messaging. However, the relatively recent transition to SOFR likely eases the way for this kind of transition. Still, policy makers and Fed watchers may need time to recalibrate their interpretation of U.S. monetary policy signals.
2. Potential Repo Market Fragility
Although TGCR reflects a broad and deep market, repo markets are not immune to idiosyncratic shocks. Events such as collateral scarcity, sudden shifts in haircuts, or dealer constraints can distort repo pricing. If the TGCR spikes due to market segmentation or operational frictions, the Fed’s credibility and control could be tested. To manage this risk, the Fed will need to actively use its repo toolkit and possibly reinforce its role as a market stabilizer during quarter-ends or stress events.
Impact on SOFR
SOFR, the Secured Overnight Financing Rate, is closely related to TGCR but incorporates additional segments of the repo market, including GCF and DVP trades. If the Fed adopts TGCR as its target, it is likely that SOFR would become more tightly aligned with the policy stance. This would generally reduce volatility in SOFR and further cement its role as a reference rate. Such alignment could benefit the market adoption of term SOFR instruments and derivatives.
However, if SOFR continues to incorporate more volatile or less representative trades, divergence could still occur. Therefore, the Fed may also consider refining SOFR’s calculation methodology or introducing a formal corridor for TGCR to minimize divergence.
Support for AXI and FXI Adoption
The shift to a repo-based target could also bolster the adoption of the Across-the-Curve Credit Spread Index (AXI) and the Financial Conditions Credit Spread Index (FXI). AXI reflects average credit spreads across a range of Treasury securities, offering insight into broad market perceptions of credit risk. With the Fed’s policy rate grounded in a risk-free, secured rate like TGCR, the role of indices like AXI and FXI becomes even more valuable. They can supplement the risk-free benchmark with a real-time measure of credit conditions, enabling a more nuanced understanding of financial stress and term premia. In a TGCR-based system, policymakers and market participants could monitor AXI and FXI to assess whether credit spreads are amplifying or dampening monetary transmission. This could enhance transparency and provide a richer toolkit for both monetary and macroprudential policy.
Conclusion
The case for shifting the Federal Reserve’s operating target from the fed funds rate to the tri-party general collateral repo rate is both strong and timely. Market structures have evolved, and the tools and benchmarks of monetary policy must evolve with them. Anchoring policy in a robust, liquid, and representative rate like TGCR enhances operational control, improves transmission, and modernizes the Fed’s framework for the next generation of financial conditions. While the transition is not without its risks, careful planning and transparent communication can mitigate them. Importantly, this shift would also support the broader ecosystem of reference rates—including SOFR, AXI, and FXI—creating a more comprehensive, transparent, and resilient foundation for U.S. monetary policy and financial markets.
Alex Roever, CFA, is the former Head of U.S. Interest Rate Strategy at JP Morgan, a Senior Director at the CFA Institute, and a Senior Advisor at SOFR Academy ([email protected]).
This note is provided for informational purposes by SOFR Academy, Inc. (Sofr.org), a financial engineering firm headquartered in New York. This note is not designed to be taken as advice or a recommendation for any investment decision or strategy. Readers should make an independent assessment of relevant economic, legal, regulatory, tax, credit, and accounting considerations and determine, together with their own professionals and advisers, if the use of any index is appropriate to their goals. Neither the USD Across-the-Curve Credit Spread Index (AXI), nor the USD Financial Conditions Credit Spread Index (FXI) are associated with or sponsored by the Federal Reserve Bank of New York or the Federal Reserve System. Additional information about SOFR Academy, AXI and FXI can be found here.
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