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12 21 2015 | by Victor Xing | Central Banks

Federal Reserve’s ON RRP: 3 days later

An important component of Federal Reserve’s interest rate control mechanism is its Overnight Reverse Repurchase Agreements (ON RRP), which became operational following Federal Reserve’s Dec 16th decision to raise the target range of federal funds rate to 0.25% – 0.50%.
Under this program, the New York Fed trading desk (the “Desk”) drains liquidity from financial markets by selling securities held on FED’s balance sheet to qualified counter-parties.  With liquidity now absorbed by the FED, lending would decline and funding conditions would tighten.  This transaction would be unwound the next day: the Desk will buy back the securities at a higher price than they were sold, thus establishing the interest rate using price differential.
The Federal Reserve has allocated about $2 trillion of its assets to facilitate the ON RRP, with a $30 billion cap for each counter-party.  Some investors initially questioned whether transaction size needed to maintain the funds rate target  would distort financial markets and increase stability risks, but latest data indicate the size of ON RRP operations have been within historic norm seen during testing.
  • 12/17/15: $105 billion
  • 12/18/15: $143 billion
  • 12/21/15: $161 billion
Daily ON RRP amount
Source: Federal Reserve Bank of New York
Even though this is only the 3th trading session since “liftoff,” New York Fed’s operation data suggest ON RRP is working as intended, and it has not led to heightened financial stability risk.
Original Quora article

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