RBC Capital Markets strategists Izaac Brook and Blake Gwinn noted in a Thursday report that Dallas Federal Reserve President Lorie Logan's remarks regarding replacing the effective federal funds rate with alternative metrics as the key policy rate represent merely the first step in a potential shift toward different central bank targets.

This marks not the first occasion that Fed officials have discussed altering policy objectives, although previous discussions have yielded no concrete results.

The strategists wrote: "However, there are two heavyweight figures within the FOMC who focus on market plumbing issues (Logan and Hammack, whose views on these matters are likely to be highly regarded by other committee members), which increases the likelihood that policy targets will indeed (eventually) change."

Challenges associated with changing policy targets are "almost entirely at the communication level," as federal funds rates, repo rates, and broader short-end conditions are already influenced by the Fed's administered rates—the overnight reverse repo facility, interest on reserve balances, and the standing repo facility rate.

They wrote: "The Federal Reserve will continue to set 25 basis point target ranges, and within that range, switching from one target rate to another does not require changing how it sets these administered rates."

The strategists agree that the Tri-party General Collateral Rate (TGCR) would be the optimal repo-based target, as it is most directly and cleanly influenced by the Fed's administered rates. Targeting the Secured Overnight Financing Rate (SOFR) would be more complex, as the general collateral portion within the SOFR basket is also driven by leverage demand, dealer balance sheet constraints, and other factors beyond the Fed's control.

Should the Federal Reserve shift to targeting repo rates, they might respond more quickly when the benchmark approaches the edges of the target range.

Even if the federal funds rate loses its status as the Fed's target rate, it will not disappear, as the market remains active and possesses "certain unique characteristics" that continue to make borrowing and lending attractive for Federal Home Loan Banks.