What would happen if the Fed lowered the Reverse Repo Facility rate?

There have been recent calls for the Federal Reserve to lower the rate it pays cash investors at the Reverse Repo Facility (RRP), or more specifically, to widen the spread between Interest on Reserve Balances (IORB) and the RRP. If the Fed took this step, what would likely happen?
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1 Comment. Leave new

  • Oscar Huettner
    April 6, 2023 9:56 am

    I certainly concur that the Fed’s pricing of its RRP facility makes it extremely attractive to traditional money market investors (probably too attractive) but I am not sure that lowering it by 15 or 20 basis points will necessarily lead to a decrease in its volumes. The are two reasons for this. 1. I believe that a significant portion of the Fed’s RRP balances are driven by the lack of repo capacity on dealers’ balance sheets. I do not see this changing any time soon. And, 2. the Fed’s facility is risk free and with the current turmoil in the banking sector conservative investors may decide to sacrifice yield for safety. In the long run sponsored and peer to peer repo may pick up sufficient momentum to pull balances away from the Fed but I worry about the expanded acceptance of these products in a stressed environment.


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