Overnight Reverse Repurchase Agreement Facility
A Federal Reserve facility where eligible non-banks lend cash to the Fed overnight against Treasury collateral, putting a hard floor under short-term interest rates.
Also called: reverse repo facility, overnight reverse repo.
Money market funds, government-sponsored enterprises and dealers hold enormous cash balances but cannot hold reserves. Without an alternative they must lend to banks at whatever rate banks offer. ON RRP gives them a risk-free option at a published rate, so they will not lend below it to anyone.
Take-up is a thermometer, not a policy setting. Large balances mean cash cannot find a better return in private markets; a decline usually means bill supply or repo rates have become more attractive.
The operation drains reserves without shrinking the Fed's balance sheet. Total liabilities are unchanged — the money simply moves from the reserves line to the reverse repo line, and only one of those is base money.
The mechanics
- Direction of cash
- From the fund to the Fed overnight; the Fed pledges Treasuries as collateral.
- Effect on reserves
- Down by the amount taken up, because the cash came out of a bank deposit.
- Effect on the Fed's sheet
- No change in size. Composition of liabilities shifts, nothing more.
The common misreading
That the Fed is 'printing money' when take-up rises. The opposite happens: ON RRP absorbs cash and shrinks the monetary base, even though the Fed's overall balance sheet stays exactly the same size.
Related terms
- Interest on Reserve BalancesThe rate the Federal Reserve pays banks on the reserves they hold with it — the administered rate that anchors the floor of the US policy corridor for banks.
- Bank reservesDeposits that commercial banks hold at the central bank — the settlement asset banks use to pay each other, and a liability of the central bank rather than an asset it owns.
- Repurchase agreementThe sale of a security combined with an agreement to buy it back at a set price and date — legally a sale, economically a loan secured by collateral.
- Monetary baseThe total of banknotes in circulation and commercial bank reserves — every form of money that is a direct liability of the central bank.
Primary sources
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