BPI: Take-up at the Federal Reserve’s ON RRP Facility: Much Larger and More Persistent than Planned, Getting Larger, and the Reasons Why

The Federal Reserve introduced the overnight reverse repurchase agreement facility (ON RRP) in 2014 to improve its control of the federal funds rate, the interest rate banks and government-sponsored enterprises (GSEs) charge each other for unsecured and mostly overnight loans. The ON RRP facility was intended to be temporary, to limit the Federal Reserve’s footprint in short-term funding markets and avoid altering the behavior of financial intermediaries in unpredictable ways. But the take-up of the ON RRP facility has surged over the past several months, and a few weeks ago, we indicated that take-up of the ON RRP could reach $1 trillion in the summer of 2021. Given the strong take-up seen over the past two months, we may have underestimated its projected growth and how persistent usage of the facility will be. In our latest post, we discuss some of the drivers of ON RRP take-up over the past few months, including the interaction between the Fed’s ongoing purchases of securities and banks’ balance sheet constraints.

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