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ON RRPs at the Fed.
With these RRPs, the Fed takes in cash against collateral (Treasury securities). RRPs are a liability on the Fed’s balance sheet – amounts the Fed owes its counterparties which are mostly MMFs, but also government-sponsored enterprises (Federal Home Loan Banks, Fannie Mae, Freddie Mac, etc.), and occasionally banks.
These counterparties use RRPs to park their extra cash risk-free at the Fed, and the Fed pays them 5.3% in interest since the last rate hike.
This 5.3% is less than what the Fed pays banks on their reserve balances (5.4%), so banks don’t use RRPs much and not for long, though they might at the end of the quarter for regulatory window dressing. They normally use their reserve accounts at the Fed to park their extra cash because they earn more than RRPs, and because they’re more liquid than RRPs.
The dropping RRP balances mean that money market funds are shifting cash from RRPs into T-bills. The primary T-bills targeted by MMFs are at the short end, with maturities of up to 3 months, which are now paying over 5.5% in yield, over 20 basis points higher than RRPs (5.3%). So that makes sense, and MMF holders are making a little more yield as well. That’s how it should be.
ON RRPs, the outlet for excess liquidity.
RRPs are a sign of massive excess liquidity in the system; they’re an outlet created by the Fed to absorb this excess liquidity, and when the system begins its long slow trip back to something more normal under QT, this cash starts draining back out of the Fed’s RRPs into T-bills, which is how it should be.
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