Take-up at the Overnight Reverse Repo Facility (ON RRP) has halved over the past six months, declining by more than $1 trillion since June 2023. This steady decrease follows a rapid increase from close to zero in early 2021 to $2.2 trillion in December 2022, and a period of relatively stable balances during the first half of 2023. In this post, researchers from the New York Fed interpret the recent drop in ON RRP take-up.
The increase in ON RRP take-up between 2021 and May 2023 was driven by a series of factors: a rise in banks’ balance-sheet costs due to the expansion of the supply of reserves in response to the COVID-19 pandemic, the rapid hikes in policy rates aimed at fighting inflation and the resulting increase in interest-rate uncertainty, and the decrease in the T-bill supply of 2021-22 resulting from the normalization of public debt after the COVID-19 crisis.
These factors have reversed: the Federal Reserve restarted running off its balance sheet after the temporary expansion during the banking turmoil of March 2023; the growth of the banking system waned while the ratio of reserves to asset decreased; the pace of interest-rate hikes slowed down; and the T-bill supply increased again. If these dynamics persist in the months ahead, ON RRP take-up may continue to decrease. Such a steady decline would be consistent with that observed in early 2018, when investment at the ON RRP gradually disappeared as the Federal Reserve continued to normalize the size of its balance sheet and reserves in the banking system became less abundant.