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Fed Tweaks Rate on Key RRP Tool for First Time Since 2021

(Bloomberg) -- The Federal Reserve, in addition to its main interest-rate cut, lowered the rate on a facility used to help control its benchmark as it aims to keep US funding markets running smoothly.

Officials lowered the rate on the overnight reverse repurchase agreement facility relative to the lower bound of the target range by 5 basis points, according to their Wednesday policy statement. Taken together with the Fed’s reduction in the overall target range for the fed funds rate to 4.25% to 4.50%, the new RRP rate is 4.25% — in line with the lower bound for the first time since 2021.

Financial institutions currently have some $132 billion in cash squirreled away at the Fed’s overnight RRP facility, which offers money-market investors with an alternative investment in order to help create a floor beneath overnight interest rates, according to the New York Fed. That’s compared to a peak of $2.55 trillion stashed at the end of 2022.

On Wall Street, balances at the facility are used to gauge how much excess liquidity is in the US financial system — and therefore how much further the Fed can keep unwinding its balance sheet via a process known as quantitative tightening. The central bank on Wednesday said it was continuing to shrink its balance sheet.

The downshift was foreshadowed in the minutes of the Fed’s November meeting, in which policymakers revealed they saw value in a potential “technical adjustment” so the RRP rate would be equal to the bottom of the target range for the federal funds rate.

Market watchers have said the move is likely to exert downward pressure on money market rates and further impact the amount of funds held at the Fed facility.

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