Fed Policymakers Mull Lowering Overnight Repo Rate

In an effort to fine-tune monetary policy, some Federal Reserve (Fed) policymakers have expressed openness to lowering the overnight reverse repurchase agreement rate (ON RRP). This technical rate, currently set at 4.55%, has been riding 5 basis points above the bottom of the Fed's policy rate range since 2021. As the Fed continues its balance sheet reduction, the ON RRP facility's balance has fallen from a peak of $2.6 trillion to just under $150 billion this week.

This proposed adjustment aims to bring the ON RRP rate back down to equal the bottom of the policy rate range, making the reverse repo facility marginally less appealing. This could push more cash out of the facility, reducing overall liquidity in the market and putting downward pressure on other money market rates. The Fed may be seeking to enhance its control over the federal funds rate by narrowing the spread between the ON RRP rate and the bottom of the monetary policy rate range.



The Fed's balance sheet reduction has been ongoing since 2022, with the ON RRP facility's balance declining significantly. This technical adjustment, if implemented, could potentially speed up the Fed's balance sheet reduction by encouraging banks to lend more to each other, reducing the need for excess reserves.

As the Fed navigates economic conditions, employment, and inflation dynamics, it is crucial to consider the potential implications of adjusting the ON RRP rate. While this technical adjustment may not significantly impact the broader monetary policy strategy, it underscores the Fed's commitment to fine-tuning monetary policy in pursuit of its dual mandate.

In conclusion, Fed policymakers are exploring the possibility of lowering the overnight reverse repurchase agreement rate to enhance control over the federal funds rate and support the balance sheet reduction. This technical adjustment, if implemented, could have modest but potentially significant effects on money market rates and liquidity in the system. As the Fed continues to assess incoming data and the evolving outlook, investors should stay attuned to the implications of these technical adjustments on the broader economy and monetary policy.