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Me_Melissa t1_issgd29 wrote

Reply to comment by OldmanRepo in US Fed's Reverse Repo Facility [OC] by rosetechnology

I saw a theory on YouTube that the Fed would decouple the RRP rate from the fed funds rate and drop the RRP rate low, causing the RRP users to take that money out in a hurry and invest it into the economy like a stimulus through loans etc.

Based on what you've said in this thread, it sounds like the YouTube theory is bs bc:

  1. RRP users are fixed income funds, not entities that lend to the public
  2. The Fed has never indicated that they'd decouple the rates

Am I tracking?

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OldmanRepo t1_isszg4x wrote

The Fed actually did the opposite back in June of 2021 and raised the award rate of the RRP from Fed Funds minus 5bps to Fed Funds plus 5bps. That made sense at the time since rates were at .00. When they increased rates in January, and each time since, they’ve left the award rate at 5bps higher. I expect the Fed to lower the award rate to 5 below at some point, probably when they think rates are high enough to pause right their tightening for a bit.

As for decoupling and making the award rate really low, no, I don’t think that would ever happen. There is a purpose for the operation and decoupling it from Fed funds would make the operation useless. That goes the same for the SRF/RP operation. They’d never decouple that from Fed funds either.

And you are correct, the main users of the RRP are money market funds. The data is available, I made this screenshot awhile ago to explain why it’s not banks https://imgur.com/a/fjmD7eC and you can see from the results that it’s 90+% money market funds. These funds don’t lend to anyone.

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