Overnight Reverse Repo
The overnight reverse repo (ON RRP) facility is a Federal Reserve tool that allows eligible counterparties to deposit excess cash at the Fed overnight in exchange for Treasury securities, effectively setting a floor on short-term interest rates.
The Overnight Reverse Repurchase Agreement facility, commonly called the ON RRP or reverse repo facility, is operated by the Federal Reserve Bank of New York on behalf of the Federal Open Market Committee. In a reverse repo transaction from the Fed's perspective, the Fed sells Treasury securities to eligible counterparties — money market funds, government-sponsored enterprises, broker-dealers, and banks — under an agreement to repurchase them the following day, paying the counterparty the ON RRP rate.
From the counterparty's perspective, this is essentially an overnight deposit at the Federal Reserve backed by Treasury collateral, offering a risk-free return. For money market funds in particular, the ON RRP facility provides a high-quality outlet for excess cash that cannot be readily deployed in traditional money markets at comparable rates.
The primary monetary policy function of the ON RRP is to establish a floor under short-term interest rates. Because money market funds and other eligible counterparties can always earn the ON RRP rate by parking cash at the Fed, they have no incentive to accept a lower rate from other borrowers. This prevents the federal funds rate and other overnight rates from falling below the Fed's target range even when financial system reserves are very abundant.
During the post-pandemic period of massive quantitative easing and fiscal stimulus, the ON RRP facility absorbed trillions of dollars from money market funds that had more cash than the private market could absorb at rates above the floor. Usage peaked at over $2.5 trillion in late 2022 and early 2023. As the Fed began quantitative tightening and the Treasury ramped up bill issuance, money market funds shifted cash from the ON RRP into Treasury bills, and facility usage declined substantially.
For investors, monitoring ON RRP usage provides insight into liquidity conditions in money markets and signals about the pace of quantitative tightening — as funds drain from the facility, it indicates that excess liquidity in the financial system is being absorbed.