So there is this Reuters article, saying that the amount of cash has peaked in Fed's RRP facility, meaning that it has entered the RRP market. It also claims that this could push short term interest rates below 0. From what I understand, the Fed is giving securities (treasuries mostly) to the market and exchange for reserves. So the supply of treasuries is growing, which by itself should increase the yields as opposed to decrease. Since the reserves are also being removed from the banking system I would think this should be looked at as a form of tightening.


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I believe that the article is instead trying to imply that the amount of cash available in the economy (not the same thing as the Fed's balance sheet) is rising and that this rising amount of cash available could put pressure on interest rates to fall below zero.

In my opinion, the Reuters article you cite is not clearly written and is leading to a misunderstanding. As you say, a reverse repurchase agreement (RRPs) is a form of a temporary open market operation used by the Federal Reserve (Fed) that tightens the supply of cash. This is also confirmed in the Reuters article. Not only that, the article further confirms that the rate on reverse repos is used to set a floor on overnight interest rates:

The Fed launched its reverse repo program in 2013 to soak up extra cash in the repo market and create a strict floor under market rates, particularly its policy rate.

Thus, the article confirms your understanding of the role of RRPs at the Fed. Also, since it's not in question that increases in the supply of money should drive overnight interest rates down, it should be clear that the Fed's RRP program serves to mitigate the effects of an increasing supply of cash and should push interest rates upward (the effects of a floor). The only possible interpretation of the article remaining is that the large and increasing amount of cash flowing into the Fed's reverse repurchase program is an indicator of how abundant cash is right now---abundant enough that overnight interest rates could turn negative. I believe that that is what the article is trying to say.

Some References:

  • From the New York Fed: "The Federal Reserve manages overnight interest rates by setting the interest on reserve balances (IORB) rate, which is the rate paid to depository institutions on balances maintained at Federal Reserve Banks. The Overnight Reverse Repo Facility (ON RRP) provides a floor under overnight interest rates by offering a broad range of financial institutions that are ineligible to earn IORB, an alternative risk-free investment option. Together, the IORB rate and the ON RRP set a floor under overnight rates, beneath which banks and non-bank financial institutions should be unwilling to invest funds in private markets."

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