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The rate that catches what IORB cannot reach

Banks can hold an account at the Federal Reserve and earn interest on the reserves sitting in it, a rate called Interest on Reserve Balances (IORB). Money market funds, government-sponsored enterprises and other non-bank lenders have no such account, so they have no equivalent floor under the rate they can accept for lending cash overnight. The overnight reverse repo facility (ON RRP) is what gives them one.

Why non-banks needed a floor of their own

Without somewhere safe to place surplus cash overnight, a money market fund would have to accept whatever rate the market offered, including a rate pushed below the Federal Open Market Committee's target range by a glut of cash chasing too few places to sit. The ON RRP rate sets the level at which those lenders can instead place cash directly with the Fed, so market rates have less room to drift beneath the range the Committee has set.

How it sits alongside the other administered rates

IORB sets the floor for banks; the ON RRP rate sets the floor for everyone else eligible to use the facility. Together with the discount rate, these are the levers the Fed adjusts by hand between meetings to keep the market rate for overnight borrowing inside the target range the Federal Open Market Committee announces. None of them is the target range itself; each is a tool for holding the market rate inside it.

The trade, step by step

How the overnight trade runs, leg by leg

A repurchase agreement, or repo, is really two trades stitched together: one side lends cash overnight, the other pledges a security against it, and the two positions unwind the next morning. In the overnight reverse repo facility, the Federal Reserve is the one taking in the cash, so it is the Fed handing out the Treasury security.

  1. Cash goes to the Fed

    An eligible counterparty, such as a money market fund, a government-sponsored enterprise, or a primary dealer, lends cash to the Federal Reserve Bank of New York overnight, at the rate the facility offers that day.

    Eligibility is limited to a set list of counterparties the New York Fed maintains; a household or an ordinary business cannot use the facility directly.

    Lending to the Fed

    The counterparty earns the overnight reverse repo rate for that night, against the security of a Treasury security.

    Lending in the private market

    The counterparty places the cash with a bank or dealer instead, at whatever rate is on offer, which only makes sense if that rate beats what the Fed is paying.

  2. The Fed pledges a Treasury security

    Against the cash it takes in, the Federal Reserve hands over a Treasury security from its own holdings, and the counterparty holds it for the length of the trade. The security stands as security for the cash lent, the same role collateral plays in any private repo trade, except that here it is the Fed passing the security out rather than taking one in.

  3. The trade reverses the next morning

    On the next business day the two legs unwind: the counterparty returns the Treasury security, and the Fed pays back the cash together with interest at the overnight reverse repo rate. Because the whole arrangement runs overnight, a counterparty that wants to keep using the facility makes the same decision again the following day.

The overnight reverse repo rate is one of the administered rates set out in the FOMC's implementation note, published alongside each policy statement.

Why the balance rises and falls

The amount sitting in the overnight reverse repo facility on any given day is not something the Federal Reserve sets directly. It is the sum of what money market funds and other eligible counterparties choose to lend to the Fed overnight, and that choice turns on what else is on offer at a comparable rate.

What draws cash into the facility

A money market fund holding cash it needs to place somewhere safe overnight will use the facility when the rate it pays beats what is available from short-term Treasury bills, bank deposits, or private repurchase agreements. When the supply of Treasury bills is thin, or when other short-term borrowers are not offering terms good enough to compete, the facility becomes the most attractive overnight home for that cash, and the balance climbs.

What pushes it back out

The balance falls when a better-paying alternative appears. Heavier issuance of Treasury bills gives money market funds more paper to buy at a competitive yield, and cash that had been sitting at the facility moves into those bills instead. The facility is not competing to keep that cash; it simply stops being the best place for it to sit overnight.

Reading the balance as a signal

Because the facility absorbs whatever cash has nowhere better to go on a given night, its balance works as a rough indicator of slack in short-term funding markets. A high balance suggests more cash is looking for a safe overnight return than the rest of the market can currently take up. A falling balance usually means that cash has found a home elsewhere, most often in Treasury bills as issuance picks up. The glossary entry for repo and reverse repo sets out the mechanics of the underlying transaction, and the balance sheet explainer covers how this activity shows up in the Fed's own published accounts.

Where the daily figures are published

The New York Fed publishes the results of each overnight reverse repo operation on its own site, in the section covering its market operations, on the morning the operation settles. The record is released daily, so a reader checking the figure for a given day is looking at that day's operation.

What the operation record shows

Each entry covers a single day's operation and lists the details a reader needs to work out how much cash counterparties placed with the Federal Reserve Bank of New York overnight and at what rate. The fields typically include:

  • The operation date, which tells you which day's activity the entry covers
  • The total amount accepted across all counterparties that day
  • The stop-out rate, the rate paid on the cash accepted
  • The number of counterparties that participated

Reading the series over time means lining up several days' entries by date and watching the total amount move.

Checking the data yourself

Because the record is published directly by the Federal Reserve Bank of New York, a reader can check any figure against the original release. The How This Site Handles Figures page sets out how figures used elsewhere on this site are dated and sourced, and the Central Banking Glossary covers the related terms, including repo and reverse repo, for a reader working through the record for the first time.