Podcast Summary: Odd Lots

Episode: Lots More with Joe Abate on the Fed's New Target and the Rising Price of Money
Date: October 3, 2025

Overview

In this episode, hosts Joe Weisenthal and Tracy Alloway explore the technical evolution of the Federal Reserve’s interest rate policy with Joe Abate, Head of Macro Strategy at SMBC Nico and longtime expert on money markets. The conversation focuses on the mechanics behind the Fed’s rate-setting, the current discussions about shifting policy benchmarks, the increasing cost of liquidity, and related market phenomena—including stablecoins and swap spreads. The discussion is sparked by a recent speech from Dallas Fed’s Lori Logan suggesting the Fed may eventually move away from targeting the Fed funds rate.

Key Discussion Points and Insights

1. The Fed’s Changing Rate-Setting Mechanisms

• Old vs. New Operating Regimes (Scarce vs. Ample Reserves)
  • Joe Abate outlines how, prior to 2008, the Fed operated a "scarce reserve regime"—keeping liquidity just below banks' desired level to create “torque” and target the fed funds rate precisely [03:51].
  • Post-2008, the regime shifted: “The Fed would supply an ample or abundant level of reserves... originally it set the target range because it wasn't confident this new structure would keep the Fed funds rate close to a pinpoint level.” [03:51–05:06]
• Impact on Market Dynamics
  • Abate explains banks stopped trading in the fed funds market because reserves were plentiful; the market became more about interest rate arbitrage mainly involving non-US banks and housing loan banks [05:07–06:34].

2. Why Does the Operational Plumbing Matter?

• Tracy Alloway poses the existential but practical question: “Who cares about the plumbing?” [06:44]
• Joe Abate responds that the mechanism is vital for communication: “The Fed uses the fed funds rate to communicate its policy intentions... it uses the dot plot, for example, defined as the fed funds rate, to provide forward guidance.” [07:12–08:43]
• All manner of rates—bank deposits, mortgages—ultimately reference expectations for Fed policy, so the “plumbing” affects transmission to the broader economy.

3. Lori Logan’s Proposal and Possible Shift Away from Fed Funds

• Recent comments from Dallas Fed's Lori Logan suggest considering a move to using a repo rate instead of the fed funds rate for targeting [08:43–09:28].
• Abate likens the current fed funds market to a stagnant “Roman lake”: not a lot of activity, mainly a device for signaling policy [09:28].
• A tri-party repo rate would have “real market activity” and offer better feedback on liquidity conditions: "If I want to run an efficient balance sheet for the Fed... I have to kind of bring down the level of reserves in the system and monitor... is it moving outside those bands and creating other sorts of distortions? And that's why I need hopefully a market traded instrument and that would be in this case the repo rate.” [10:19–11:16]

4. Does Balance Sheet Size Matter?

• Tracy Alloway presses on the cost/benefit of an “inefficient” or oversized Fed balance sheet [11:16–12:01].
• Abate: “Having plenty of reserves in the system increases the safety of banks... An inefficient balance sheet would be one where you could argue that banks are overstocked with reserves,” crowding out other assets, sometimes leading to instability (e.g., sudden outflows of deposits when the Fed raises rates) [12:01–14:36].

5. Why Tri-Party Repo and Not SOFR as a Benchmark?

• Joe Weisenthal asks about using SOFR instead of tri-party repo: “Why the tri party rate and not something like SOFR... the de facto benchmark money market rate?” [15:51]
• Abate explains SOFR includes less directly comparable transactions (bilateral repo for specific securities), while the tri-party repo market is purer as a financing market and more reflective of actual liquidity [16:05–17:23].

6. How Soon and How Could the Fed Shift Its Target?

• Technical and communications challenges exist, but Abate thinks a shift is plausible “probably sooner than people think,” though not within the next two years [17:39].
• Historically, Fed policy communication has continually evolved: from operational nudges to explicit targets announced in minutes [17:39–19:14].
• Alloway: “Does it not need to intervene directly as much... because everybody knows that it can achieve it and so the market will take care of any deviations?”
  Abate: Yes, “They've kind of eliminated the fine tuning that they would need to do to get the Fed funds rate to the target.” [19:48–20:24]

7. Reserves are Still “Ample,” But the Price of Liquidity Is Rising

• Weisenthal and Abate discuss repo market pressures and the slowly decreasing cushion of reserves—with repo rates rising and non-US banks hit hardest [20:24–22:46].
• Abate: “Reserves may be ample at the moment, but their price is going up because the amount of that ampleness is getting smaller and smaller... Foreign banks are the ones who are trading in the Fed funds market. So their cost of liquidity is going up.” [20:58–22:46]

8. Stablecoins as Money Market Analogues and Payment Tools

• Abate compares stablecoins to money market funds—potential large buyers of T-bills, which could facilitate Treasury funding without raising rates [22:54].
• Sees limited US demand, expects more demand for stablecoin payment tokens in underbanked regions or for remittances, acting like substitutes for $100 bills [22:54–26:41].
• Memorable Banter:
  • Abate: “I think the average on person currency amount is about $60, but per capita currency in the US is something like $7,000 or more. So there's a significant volume of US currency that's held offshore... There are $19,100 bills out there.”
    Alloway: “$19,100 bills?” [25:10-25:12]
    Weisenthal: “I have none of them.”
    Alloway: “No, I have a few. For the last time I played poker.”
    [25:13–25:18]

9. Swap Spreads and Global Fiscal Concerns

• Weisenthal raises widening swap spreads worldwide [26:41].
• Abate: “There’s a general global theme about fiscal prudence... the amount of government debt outstanding is increasing and doesn’t seem to be going anywhere but up. The result of that is that people demand a premium for holding that government debt.” [27:07]
• Not only a US issue; similar trends across developed markets [27:07–28:17].

Notable Quotes & Memorable Moments

• On why plumbing matters:
  “There's a twofold implication, if you will, for the fed funds market. One is the Fed uses the fed funds rate to communicate its policy intentions... The second element is... how does the Fed's intentions get translated into bank deposit rates, mortgage rates, et cetera.”
  — Joe Abate [07:12–08:43]

• On the change in rate targeting:
  “If you move to a different barometer, let's say a tri party repo rate... you would get not only the communications element, but you'd also get a feedback on how well the Fed is doing in managing liquidity.”
  — Joe Abate [10:21]

• On the cost of inefficiency:
  “An inefficient balance sheet would be one where you could argue that banks are overstocked with reserves... And anything that's low in price, you have an incentive to hold more than you probably need.”
  — Joe Abate [12:01]

• On stablecoin utility:
  “My sense... is I think of the payment tokens as a closer substitute for currency than a... bank deposit. If you think about currency generally, right, there’s... about $7,000 [per capita] in the US. So there’s a significant volume of US currency that’s held offshore.”
  — Joe Abate [24:24]

• Memorable banter on $100 bills:
  “There are $19,100 bills out there.”
  — Joe Abate
  “$19,100 bills?”
  — Tracy Alloway [25:10-25:12]

Timestamps for Important Segments

• [03:51] – Evolution of Fed rate-setting mechanics; shift from scarce to ample reserve regime
• [06:44] – "Who cares about the plumbing?" and the importance of transmission
• [08:43] – Discussion of Lori Logan’s proposal to change the monetary policy target
• [11:16] – Debate on costs and implications of an “inefficient” Fed balance sheet
• [15:51] – Comparison between tri-party repo and SOFR as policy targets
• [17:39] – Feasibility and timing of the Fed moving to a new target instrument
• [20:58] – Rising price of liquidity and effects of declining reserves
• [22:54] – Stablecoins as a new source of Treasury bill demand; global implications
• [26:41] – Widening swap spreads and the global fiscal outlook

Overall, this episode illuminates the intricacies behind interest rate policy, highlights current debate in central banking circles about market benchmarks, and explores how systemic changes affect everything from Treasury markets to stablecoins.