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Overnight reverse repurchase agreements, known as Overnight Reverse Repurchase or ON RRP, are a monetary policy tool introduced by the Federal Reserve in 2013.

2026-08-07·x-repost-20260807-022550

Overnight reverse repurchase agreements, known as Overnight Reverse Repurchase or ON RRP, are a monetary policy tool introduced by the Federal Reserve in 2013. Their purpose is to allow the Fed to quickly absorb excess dollars from outside the banking system over the short term.

They are primarily used to reduce dollar liquidity in the market and serve as the lower bound of the Fed’s interest-rate corridor—the so-called “floor rate.” The overnight reverse repo facility effectively creates a short-term “balance-sheet contraction.” Because the dollars in the market are transferred into accounts at the Federal Reserve, they are temporarily removed from circulation.

For this reason, monitoring the volume of overnight reverse repos is important for understanding dollar liquidity in the market. The overnight reverse repo process works as follows: On one day, the Federal Reserve “lends” securities from its holdings to institutions, while the institutions place their dollars into accounts at the Fed.

On the following day, the Fed returns those dollars, along with a certain amount of interest, and the institutions return the securities they received the previous day. In this process: - “Securities” include U.S. Treasury securities, agency securities, and mortgage-backed securities (MBS).

- “Institutions” include money market funds and financial depository institutions, as well as other institutions outside the banking system. - “Interest” is calculated based on the overnight reverse repo rate. The original purpose of the overnight reverse repo facility was to help the Federal Reserve better manage dollar liquidity in the market.

When there is an excess supply of dollars, the Fed can use the facility to absorb those excess dollars and help restore market stability. The overnight reverse repo rate is set by the Federal Reserve and serves as the lower bound of the Fed’s interest-rate corridor.

It is important to note that overnight reverse repos differ from the Federal Reserve’s overnight repo facility, known as the Standard Repo Facility, or SRF. The two processes work in opposite directions: overnight reverse repos withdraw liquidity from the market, while the repo facility injects liquidity into the market.

## Why Are Overnight Reverse Repos Important? The overnight reverse repo facility was introduced to help the Federal Reserve reduce the amount of dollars circulating in the market.

When there is an excess supply of dollars, the facility provides an effective way to absorb that surplus, maintain appropriate market liquidity, and support the healthy functioning of financial markets.

Below is PensionCraft’s explanation of overnight reverse repos: The overnight reverse repo facility works as follows: If there is an excess supply of dollars in the market and the surplus is not absorbed in a timely manner, the abundance of dollars could contribute to inflation and disrupt the normal functioning of the economy.

At the same time, overnight reverse repos can serve as a demand deposit-like account for dollars held by financial institutions. When financial institutions urgently need dollars, they can withdraw the funds placed in overnight reverse repos without having to sell their Treasury securities. This also helps support stability in the Treasury market.

For financial institutions, if excess dollars cannot earn a reasonable return through conventional financial investments, they can seek an asset-allocation option that offers a safe and reasonable return.

An institution can submit a request for an overnight reverse repo to the Federal Reserve, transfer its excess cash to the Fed, and receive securities in exchange. The following day, it returns the securities to the Fed, receives its principal back, and earns interest.

If necessary, the institution can repeat the transaction the next day, allowing its excess cash to generate a return. When overnight reverse repos continue to take place, they are effectively equivalent to the Federal Reserve removing excess dollars from the market.

As long as an overnight reverse repo is outstanding, the funds remain in an account at the Federal Reserve rather than circulating in the market. The effect is similar to a contraction of the Fed’s balance sheet.

In this way, overnight reverse repos absorb excess cash from the market by having the Federal Reserve “sell” securities and then provide interest when it “buys” them back, helping the Fed maintain a balance in market liquidity. ## Why Did the Federal Reserve Introduce the Overnight Reverse Repo Facility?

The Federal Reserve regulates dollar liquidity in the market by setting a Federal Funds Target Rate, commonly known as an “anchor rate.” Through the federal funds rate, the Fed raises the target rate when inflation emerges in order to curb inflation and control price increases.

When deflation occurs, the Fed lowers the rate to increase money circulation in the market and stimulate consumption. However, the rate used in practice is not a fixed value.

Instead, it is an interest-rate range based on the target federal funds rate, commonly known as the “interest rate corridor.” The Interest Rate Corridor is the range of rates the Fed offers when providing lending and deposit facilities to financial institutions. The lower bound of this corridor is set by the Fed’s overnight reverse repurchase rate.

To address the possibility of a severe surplus of U.S. dollars, the Fed introduced the overnight reverse repurchase facility. When the federal funds rate cannot effectively control money circulation, the Fed can use this facility to quickly absorb excess cash from outside the banking system in the short term.

During this process, if the FFR is higher than the ON RRP rate, institutions can earn more interest by lending funds to other financial institutions than by lending them to the Fed. In that case, the ON RRP facility has no effect.

If the FFR temporarily falls below the ON RRP rate, institutions have more incentive to lend their excess funds to the Fed in exchange for a higher return. The ON RRP facility then begins to function, allowing the Fed to effectively withdraw excess cash from the market. At the same time, it pushes the FFR back above the ON RRP rate.

Therefore, the ON RRP rate becomes the lower bound of the interest rate corridor. In the past, the overnight reverse repurchase facility was only a supplementary tool for the Fed’s monetary policy, and its usage and transaction volume were relatively small. However, beginning in 2021, its transaction volume rose rapidly, recently exceeding $2 trillion.

Data source: Federal Reserve Bank of St. Louis This was primarily related to the Fed’s efforts to stimulate the economy during the COVID-19 pandemic by increasing the money supply. As the pandemic eased and industries resumed operations, the additional dollars became excess cash in the market.

At the same time, the prices of nearly all investment assets had become significantly overvalued. As a result, institutions used their excess cash to exchange for securities from the Fed and earn interest through overnight reverse repurchase transactions, generating a total ON RRP balance of more than $2 trillion.

The Fed also temporarily withdrew some excess cash from the market, producing a short-term “balance-sheet reduction” effect. ## How Is the Overnight Reverse Repurchase Rate Set?

The overnight reverse repurchase rate is set at meetings of the Federal Open Market Committee, or FOMC, and overnight reverse repurchase operations are conducted through the New York Fed’s Open Market Trading Desk [source]. For example, on October 25, 2022, the overnight reverse repurchase rate was 3.05%.

Therefore, the actual interbank lending rate was higher than 3.05%. In other words, if the Bank of Japan deposited its excess U.S. dollars with the Federal Reserve, the Bank of Japan The historical data for the overnight reverse repurchase rate are shown below: Overnight reverse repurchase rate: Federal Reserve Bank of St.

Louis To emphasize once again, the overnight reverse repurchase rate is the lower bound of the interest rate corridor set by the Federal Reserve. ## What Does an Increase in Overnight Reverse Repurchase Volume Mean? An increase in overnight reverse repurchase volume often means that institutions are holding a large amount of excess funds.

For example, overnight reverse repurchase volume began rising sharply in 2021. This phenomenon may indicate several issues worth monitoring [source]: 1. Excess dollars outside the banking system Institutions outside the banking system mainly refer to money market funds, or MMFs. These are personal accounts similar to interest-bearing checking accounts.

During COVID-19, quantitative easing significantly increased the supply of dollars in the market through large-scale purchases of U.S. Treasury securities and MBS. These accounts also received substantial amounts of funding, while high-quality investment opportunities were in short supply.

Therefore, as COVID-19 eased and eventually ended, the surge in funds created excess dollar liquidity, which increased overnight reverse repurchase activity. ## 2. The Supply of U.S. Treasury Securities Declined During COVID-19, the Treasury increased its issuance of U.S. Treasury securities to address the impact of the pandemic.

This increased the amount of reserves in the U.S. Treasury’s TGA account. As the pandemic eased, the Treasury began reducing the volume of Treasury securities it issued. As Treasury issuance declined, the amount of risk-free assets available for investment in the market decreased.

This increased the amount of dollars held in the market, leading to higher ON RRP usage. ## More U.S. Investing Guides [What are Bollinger Bands and how do I use them?] [What is Moving Average (MA)?] [What is the Money Flow Index (MFI)? And How to use it?] [What is the Federal Reserve’s balance sheet?] [What Is Minority Interest?

How Should a Subsidiary’s Earnings Be Treated?] [What Is Shareholders’ Equity?] [What Is the Price-to-Cash-Flow Ratio (P/CF)? How Is It Calculated?] [What Are Operating Expenses (OpEx)?] [What Is Cost of Goods Sold (COGS)?] [What Is a Company’s Preferred Stock?]

Full text

Overnight reverse repurchase agreements, known as Overnight Reverse Repurchase or ON RRP, are a monetary policy tool introduced by the Federal Reserve in 2013.

Overnight reverse repurchase agreements, known as Overnight Reverse Repurchase or ON RRP, are a monetary policy tool introduced by the Federal Reserve in 2013. Their purpose is to allow the Fed to quickly absorb excess dollars from outside the banking system over the short term. They are primarily used to reduce dollar liquidity in the market and serve as the lower bound of the Fed’s interest-rate corridor—the so-called “floor rate.” The overnight reverse repo facility effectively creates a short-term “balance-sheet contraction.” Because the dollars in the market are transferred into accounts at the Federal Reserve, they are temporarily removed from circulation. For this reason, monitoring the volume of overnight reverse repos is important for understanding dollar liquidity in the market. The overnight reverse repo process works as follows: On one day, the Federal Reserve “lends” securities from its holdings to institutions, while the institutions place their dollars into accounts at the Fed. On the following day, the Fed returns those dollars, along with a certain amount of interest, and the institutions return the securities they received the previous day. In this process: - “Securities” include U.S. Treasury securities, agency securities, and mortgage-backed securities (MBS). - “Institutions” include money market funds and financial depository institutions, as well as other institutions outside the banking system. - “Interest” is calculated based on the overnight reverse repo rate. The original purpose of the overnight reverse repo facility was to help the Federal Reserve better manage dollar liquidity in the market. When there is an excess supply of dollars, the Fed can use the facility to absorb those excess dollars and help restore market stability. The overnight reverse repo rate is set by the Federal Reserve and serves as the lower bound of the Fed’s interest-rate corridor. It is important to note that overnight reverse repos differ from the Federal Reserve’s overnight repo facility, known as the Standard Repo Facility, or SRF. The two processes work in opposite directions: overnight reverse repos withdraw liquidity from the market, while the repo facility injects liquidity into the market. ## Why Are Overnight Reverse Repos Important? The overnight reverse repo facility was introduced to help the Federal Reserve reduce the amount of dollars circulating in the market. When there is an excess supply of dollars, the facility provides an effective way to absorb that surplus, maintain appropriate market liquidity, and support the healthy functioning of financial markets. Below is PensionCraft’s explanation of overnight reverse repos: The overnight reverse repo facility works as follows: If there is an excess supply of dollars in the market and the surplus is not absorbed in a timely manner, the abundance of dollars could contribute to inflation and disrupt the normal functioning of the economy. At the same time, overnight reverse repos can serve as a demand deposit-like account for dollars held by financial institutions. When financial institutions urgently need dollars, they can withdraw the funds placed in overnight reverse repos without having to sell their Treasury securities. This also helps support stability in the Treasury market. For financial institutions, if excess dollars cannot earn a reasonable return through conventional financial investments, they can seek an asset-allocation option that offers a safe and reasonable return. An institution can submit a request for an overnight reverse repo to the Federal Reserve, transfer its excess cash to the Fed, and receive securities in exchange. The following day, it returns the securities to the Fed, receives its principal back, and earns interest. If necessary, the institution can repeat the transaction the next day, allowing its excess cash to generate a return. When overnight reverse repos continue to take place, they are effectively equivalent to the Federal Reserve removing excess dollars from the market. As long as an overnight reverse repo is outstanding, the funds remain in an account at the Federal Reserve rather than circulating in the market. The effect is similar to a contraction of the Fed’s balance sheet. In this way, overnight reverse repos absorb excess cash from the market by having the Federal Reserve “sell” securities and then provide interest when it “buys” them back, helping the Fed maintain a balance in market liquidity. ## Why Did the Federal Reserve Introduce the Overnight Reverse Repo Facility? The Federal Reserve regulates dollar liquidity in the market by setting a Federal Funds Target Rate, commonly known as an “anchor rate.” Through the federal funds rate, the Fed raises the target rate when inflation emerges in order to curb inflation and control price increases. When deflation occurs, the Fed lowers the rate to increase money circulation in the market and stimulate consumption. However, the rate used in practice is not a fixed value. Instead, it is an interest-rate range based on the target federal funds rate, commonly known as the “interest rate corridor.” The Interest Rate Corridor is the range of rates the Fed offers when providing lending and deposit facilities to financial institutions. The lower bound of this corridor is set by the Fed’s overnight reverse repurchase rate. To address the possibility of a severe surplus of U.S. dollars, the Fed introduced the overnight reverse repurchase facility. When the federal funds rate cannot effectively control money circulation, the Fed can use this facility to quickly absorb excess cash from outside the banking system in the short term. During this process, if the FFR is higher than the ON RRP rate, institutions can earn more interest by lending funds to other financial institutions than by lending them to the Fed. In that case, the ON RRP facility has no effect. If the FFR temporarily falls below the ON RRP rate, institutions have more incentive to lend their excess funds to the Fed in exchange for a higher return. The ON RRP facility then begins to function, allowing the Fed to effectively withdraw excess cash from the market. At the same time, it pushes the FFR back above the ON RRP rate. Therefore, the ON RRP rate becomes the lower bound of the interest rate corridor. In the past, the overnight reverse repurchase facility was only a supplementary tool for the Fed’s monetary policy, and its usage and transaction volume were relatively small. However, beginning in 2021, its transaction volume rose rapidly, recently exceeding $2 trillion. Data source: Federal Reserve Bank of St. Louis This was primarily related to the Fed’s efforts to stimulate the economy during the COVID-19 pandemic by increasing the money supply. As the pandemic eased and industries resumed operations, the additional dollars became excess cash in the market. At the same time, the prices of nearly all investment assets had become significantly overvalued. As a result, institutions used their excess cash to exchange for securities from the Fed and earn interest through overnight reverse repurchase transactions, generating a total ON RRP balance of more than $2 trillion. The Fed also temporarily withdrew some excess cash from the market, producing a short-term “balance-sheet reduction” effect. ## How Is the Overnight Reverse Repurchase Rate Set? The overnight reverse repurchase rate is set at meetings of the Federal Open Market Committee, or FOMC, and overnight reverse repurchase operations are conducted through the New York Fed’s Open Market Trading Desk [source]. For example, on October 25, 2022, the overnight reverse repurchase rate was 3.05%. Therefore, the actual interbank lending rate was higher than 3.05%. In other words, if the Bank of Japan deposited its excess U.S. dollars with the Federal Reserve, the Bank of Japan The historical data for the overnight reverse repurchase rate are shown below: Overnight reverse repurchase rate: Federal Reserve Bank of St. Louis To emphasize once again, the overnight reverse repurchase rate is the lower bound of the interest rate corridor set by the Federal Reserve. ## What Does an Increase in Overnight Reverse Repurchase Volume Mean? An increase in overnight reverse repurchase volume often means that institutions are holding a large amount of excess funds. For example, overnight reverse repurchase volume began rising sharply in 2021. This phenomenon may indicate several issues worth monitoring [source]: 1. Excess dollars outside the banking system Institutions outside the banking system mainly refer to money market funds, or MMFs. These are personal accounts similar to interest-bearing checking accounts. During COVID-19, quantitative easing significantly increased the supply of dollars in the market through large-scale purchases of U.S. Treasury securities and MBS. These accounts also received substantial amounts of funding, while high-quality investment opportunities were in short supply. Therefore, as COVID-19 eased and eventually ended, the surge in funds created excess dollar liquidity, which increased overnight reverse repurchase activity. ## 2. The Supply of U.S. Treasury Securities Declined During COVID-19, the Treasury increased its issuance of U.S. Treasury securities to address the impact of the pandemic. This increased the amount of reserves in the U.S. Treasury’s TGA account. As the pandemic eased, the Treasury began reducing the volume of Treasury securities it issued. As Treasury issuance declined, the amount of risk-free assets available for investment in the market decreased. This increased the amount of dollars held in the market, leading to higher ON RRP usage. ## More U.S. Investing Guides [What are Bollinger Bands and how do I use them?] [What is Moving Average (MA)?] [What is the Money Flow Index (MFI)? And How to use it?] [What is the Federal Reserve’s balance sheet?] [What Is Minority Interest? How Should a Subsidiary’s Earnings Be Treated?] [What Is Shareholders’ Equity?] [What Is the Price-to-Cash-Flow Ratio (P/CF)? How Is It Calculated?] [What Are Operating Expenses (OpEx)?] [What Is Cost of Goods Sold (COGS)?] [What Is a Company’s Preferred Stock?]

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