The Fed’s Reverse Repo Facility Running Dry
The Fed ON RRP, a reverse repo facility, is a background financial plumbing tool managed by the Federal Reserve. Starting in March of 2021, Financial Institutions began borrowing debt securities in substantial quantities from the Fed, mainly Treasury bonds, and lent cash to the Fed in exchange. This liquidity management provided a smooth means for the Fed to gain cash and money markets to gain returns for their investors.
The activity that occurred from 2021 to 2023 largely reflected shifts of bank deposits that pay very little interest to earn higher interest rates offered at Money Market Funds, which yield similarly to shorter term Treasury bills. During this time the balance at the Fed ON RRP rose substantially. The cash held within the ON RRP acted as a storage facility that, in part, would fuel the next stock buying craze alongside the government’s borrowing binge to fund massive spending. As government expenditures inefficiently and wastefully pressed the economy forward, in 2023 investors began shifting funds from the money markets into the equity markets.
The decline in the Fed ON RRP began in April of 2023 as investors sought to redeploy much of that cash into the equity markets. Today, the cash in the ON RRP is almost gone. The facility is down to $500 billion. It seems Chuck Schumer would gladly ship off this amount to fund Ukraine.
What does this mean? – there is no excess liquidity residing in the Reverse Repo Facility; hence, a key source of liquidity is gone, threatening short-term funding rates such as repo rates that are critical for banking liquidity. This also means that fuel for the stock market through consumption of cash in money markets is gone as well. These are both reasons to expect rising volatility and banking instability.
As the equity markets attempt to stretch their meteoric rise, this constrains that rise and takes us a step closer to the end of the rally.
See this chart directly from the Fed – where you can enter dates to see what I described above:
https://fred.stlouisfed.org/graph/?g=1hrOY
The activity that occurred from 2021 to 2023 largely reflected shifts of bank deposits that pay very little interest to earn higher interest rates offered at Money Market Funds, which yield similarly to shorter term Treasury bills. During this time the balance at the Fed ON RRP rose substantially. The cash held within the ON RRP acted as a storage facility that, in part, would fuel the next stock buying craze alongside the government’s borrowing binge to fund massive spending. As government expenditures inefficiently and wastefully pressed the economy forward, in 2023 investors began shifting funds from the money markets into the equity markets.
The decline in the Fed ON RRP began in April of 2023 as investors sought to redeploy much of that cash into the equity markets. Today, the cash in the ON RRP is almost gone. The facility is down to $500 billion. It seems Chuck Schumer would gladly ship off this amount to fund Ukraine.
What does this mean? – there is no excess liquidity residing in the Reverse Repo Facility; hence, a key source of liquidity is gone, threatening short-term funding rates such as repo rates that are critical for banking liquidity. This also means that fuel for the stock market through consumption of cash in money markets is gone as well. These are both reasons to expect rising volatility and banking instability.
As the equity markets attempt to stretch their meteoric rise, this constrains that rise and takes us a step closer to the end of the rally.
See this chart directly from the Fed – where you can enter dates to see what I described above:
https://fred.stlouisfed.org/graph/?g=1hrOY
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