This video and the next are about the Reverse Repro facility operated by the FED.
This might seem to be an obscure and rather unimportant aspect of the Economy, but I can assure you that it’s had a relatively big impact on your life - at least with regard to the latest round of FED rate hikes starting back in Spring 2022 and it might well come to have a very big impact on your life at some point in the not-too-distant future.
Permit me to explain …
First off, I need to explain what a FED Reverse Repro Facility is (for those people listening who don’t already know).
The FED sells a security to a Financial institution with an agreement to repurchase that same security from the Financial institution at a higher price and at some time in the future – usually overnight.
This arrangement that the two parties enter into is known as an “Overnight Reverse Repurchase Agreement”.
The difference between the original sale price and the higher repurchase price is viewed by both parties as being an interest payment.
The Reverse Repro Rate is the interest rate given to financial institutions for using this Facility. It determines how much the difference is between the original sale price and the higher repurchase price.
The Open Market Trading Desk, abbreviated to “the Desk”, at the NY FED is responsible for conducting these operations.
Who is it for?
Well, it’s a facility offered to certain financial institutions … certain “eligible RRP counterparties” such as the Big Commercial banks and Money Market Funds ... more on which later.
I should say that this Facility is, of course, not available to the general public. You and I, the ordinary folk of this world, are not able take advantage of this Facility.
Why do the financial institutions use this facility?
Well, the interest financial institutions get from the FED buying back the securities acts as an incentive to put currency into the Reverse Repo Account.
To put this in plainer terms, the financial institutions basically get money for nothing, so the question becomes … Why wouldn’t they do this?
The other thing to say is that this money is risk free … or at least as risk free as anything can be.
So, from the point of view of the financial institutions, it’s an incredibly good deal.
It’s important to be aware that banks don’t want too many deposits on their balance sheet because deposits represent a liability (as opposed to an asset). This is because someone depositing money into a bank is in the eyes of the law making a loan to the bank. They’re regarded as an “unsecured creditor”. I should also say that banks make money from loans that they make not the deposits that they hold. But talking any more about this would take us off topic and is perhaps the subject of another video.
Whatever … All I need to say here is that this operation might apply to ordinary times. But we’re not living in ordinary times.
Moving on …
Another more important question to ask is … What’s the reason behind the FED
