Fed reverse repo facility hits record $2.554 trillion – Reuters

Fed reverse repo facility hits record $2.554 trillion - Reuters

NEW YORK, Dec. 30 (Reuters) – A major facility the Federal Reserve is using to control short-term interest rates led to record inflows on Friday, the last trading day of the year.

The New York Fed said it is reverse repo facility raised $2.554 trillion in cash from money market funds and other eligible financial firms, surpassing the previous September 30 high water when inflows totaled $2.426 trillion.

Cash flow almost certainly tipped into record territory following a typical quarter-end pattern that could be further exacerbated by the end of the year. On those dates, many financial firms prefer to park cash at the central bank rather than in private markets for a variety of reasons.

The Fed’s reverse repo facility has been very active for some time. After seeing almost no withdrawal for a long period of time, cash began to move to the central bank in the spring of 2021 and grew steadily thereafter. Daily reverse repo usage holds more than $2 trillion as of June.

The reverse repo facility draws cash from eligible financial firms in a de facto loan from the Fed. The current rate stands at 4.3%, which is a rate of return often better than short-term private sector borrowing rates.

The reverse repo facility is designed to provide a soft floor for short-term interest rates and the Federal Funds target rate, the Fed’s primary tool for achieving its job and inflation mandates. To determine the top of the range, the Fed also pays depository banks to park cash at the central bank interest on reserve balances now stands at 4.4%.

The federal funds rate is currently set at between 4.25% and 4.5% and is trading at 4.33% as of Friday, tied between the reverse repo and interest on reserve balances.


Even with the massive use of the reverse repos, Fed officials have consistently been unconcerned about the large inflows, just as some in the financial markets have been concerned about the prospect of the Fed taking the life out of the borrowing and lending of the private money market could achieve.

Fed officials also expected that, as the central bank continues its rate hikes aimed at lowering very high levels of inflation, the use of the reverse repo facility should fall. But that has yet to happen, and some markets now believe that consistently high utilization of the Fed facility will continue for some time to come.

Research from the New York Fed has suggested that bank regulation issues are keeping demand for the Fed reverse repo tool high. Meanwhile the Kanas City Fed added his view that large inflows are linked to limited investment opportunities in the private market and policy uncertainty.

The strong inflow of cash to the central bank should not alarm central bankers, but it has pushed their operations into a de facto loss. The Fed finances itself through interest on the bonds it owns and by providing services to the financial community. Normally it earns a notable profit and by law returns it to the Treasury.

Currently, the cost of paying interest on reverse repos and on reserve balances exceeds the income. The Fed reported on Thursday that starting Dec. 28, an accounting benchmark will be used to track the loss amounted to $18 billion. Many observers expect that the Fed’s plans to raise interest rates further and keep them at a high level will eventually mean quite significant losses for the central bank, even if those losses will not affect the Fed’s monetary policy .

Reporting by Michael S. Derby; Edited by Chizu Nomiyama

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