ON REPO & ON RRPO – done by NY FED to conduct monetory operations to control effective Federal funds rate & reserve balances.
Fed reverse repo time series last 5 years
Fed reverse repo time series all time chart
Reverse repo usually only increased post bouts of QE (Post GFC/Post covid)
Repo (Repurchase Agreement)
A repo is a short-term lending operation conducted by the Federal Reserve to inject liquidity into the financial system.
Economic interpretation:
➕ Repo = Liquidity injection
➕ Encourages lending and eases funding conditions
How it works:
The Fed provides cash to eligible counterparties — typically primary dealers, banks, and financial institutions — in exchange for high-quality collateral (mainly U.S. Treasuries or agency MBS).
These transactions are structured as agreements to repurchase the securities at a slightly higher price, implying an interest rate (the repo rate).
Purpose:
Repos are conducted at or near the upper bound of the Federal Funds target range (currently around 4%).
They add liquidity to the banking system and help keep short-term rates from rising too much above the Fed’s policy target.
A reverse repo is the opposite — it is used by the Federal Reserve to drain liquidity from the financial system.
- How it works:
The Fed borrows cash from eligible counterparties (money market funds, GSEs, and banks) and provides them with safe short-term collateral, usually Treasuries, in return.
Participants earn the overnight reverse repo rate (ON RRP) — the lower bound of the Federal Funds rate corridor. - Purpose:
Reverse repos help absorb excess reserves in the system, particularly when there is too much liquidity that could push short-term market rates below the Fed’s target range. - Recent history:
After COVID-19, the Fed’s massive quantitative easing (QE) programs flooded the system with liquidity.
To prevent short-term interest rates from falling into negative territory, the Fed expanded its ON RRP facility.
Money Market Funds (MMFs) became major users, as the RRP rate provided a safe return alternative. - Economic interpretation:
➖ Reverse Repo = Liquidity withdrawal
➖ Tightens financial conditions
➖ Often rises when credit conditions tighten or risk aversion increases
as you can see from RRPO chart, the overnight operations exploded post covid as Fed overused Reverse repo to put floor on falling interest rate.
It laso increased during SVB crisis as banks & clientys were worried about the credibility of other banks which led to increase in balances held at money market funds and when in turn used this facility to park the reserves overnight.
To read and know more about reverse repo & its motives you can find a great writeup in this blog ==> https://www.soonparted.co/p/on-rrp