What it is
In a reverse repo, the Fed sells a security to a counterparty and agrees to buy it back the next day at a slightly higher price, effectively borrowing money. This facility drains excess cash from the financial system, providing a floor for short-term interest rates. Eligible participants include money market funds, banks, and government-sponsored enterprises.
The reverse repo facility is used by the Federal Reserve to manage the federal funds rate and absorb liquidity from the market. High usage of the ON RRP facility indicates ample cash in the financial system and can signal that short-term market rates are close to the rate offered by the Fed. It helps ensure the federal funds rate stays within the FOMC's target range.
Why it matters
This facility helps the Fed control short-term interest rates and manage overall money supply by temporarily removing cash from the system.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice