The encyclopedia · Finance & Accounting · Operational decision · 2013–2021
The Fed's overnight reverse repo facility put a rate floor under money markets
Cash-rich money funds can park funds at the Fed overnight, so short rates can't fall below the offered rate — a floor that absorbed a record $1.6T in 2021.
Federal Reserve System
the move
After large-scale asset purchases flooded the banking system with reserves, the Fed needed to control short-term rates. Paying interest on reserves set a floor for banks, but much of the cash in money markets sits with non-banks, where rates could drift below the target range.
The answer was the overnight reverse repurchase agreement facility: the Fed borrows cash overnight from a broad set of counterparties — money-market funds, GSEs and dealers — at an announced rate, against Treasuries. A 2015 Fed paper called it an innovative complement to interest on reserves for setting an effective floor.
The tool went from experiment to cornerstone. On 28 July 2021 the FOMC directed the Desk to conduct ON RRP operations at 0.05 percent with an $80 billion per-counterparty daily limit, and to run a standing repo facility at 0.25 percent — a full corridor for money markets.
The floor was tested at scale in 2021 as cash flooded short-term markets: usage hit a record $1.605 trillion on 30 September 2021 across 92 participants, and money-market rates stayed pinned near the bottom of the target range.
why it works
- Non-bank cash holders get a guaranteed rate, so nothing trades below it.
- The facility works at any balance-sheet size, not just in normal times.
- Announced rates and limits make the floor predictable to the market.
- A standing repo ceiling completes the corridor for stressed days.
what transfers
A policy floor only works if the institutions that actually hold the cash can use it: extend the facility to non-banks and the floor holds where the market really trades.
what came after
The ON RRP facility became a permanent part of the Fed's implementation framework, absorbing trillions during balance-sheet runoff; in 2022-23 usage remained in the trillions as the Fed raised rates, and the corridor design was studied by other central banks building floors for their own money markets.
references
- Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations (FEDS 2015-010)
- Implementation Note issued July 28, 2021
- Fed Reverse Repo Use Hits $1.6 Trillion on Last Day of Quarter
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