Fed’s Reverse Repos Hit $503 Billion. Liquidity Drain Undoing over 4 Months of QE
The Fed sold a record $503 billion in Treasury securities this morning via overnight “reverse repos” (RRP) to 59 counterparties, and thereby took in $503 billion in cash from the counterparties. These overnight RRPs will mature and unwind tomorrow. Yesterday’s record $497 billion in overnight RRPs matured this morning and were replaced by this new and even larger flood.
“Reverse repos” are the opposite of “repos.” They drain cash from the market and are liabilities on the Fed’s balance sheet – money the Fed owes the counterparties.
A similar phenomenon, but on a smaller scale, occurred starting in 2014 as the US financial system was awash in cash following years of QE. And at the end of the quarter, particularly at the end of the year, RRP balances spiked. The phenomenon declined as the Fed began shedding its assets from late 2017 to 2019. But this time overnight RRPs spiked beyond those levels during the middle of the quarter – with June 30 coming up:
By having drained $503 billion in cash from the market via these overnight reverse repos, the Fed has undone the liquidity effect of 4.2 months of QE, which continues at a rate of about $120 billion a month.
