KC Fed on Big Declines in RRP
The Federal Reserve Bank of Kansas City published, "Rapid Declines in the Fed’s Overnight Reverse Repurchase (ON RRP) Facility May Start to Slow," which says, "The value of assets held at the Federal Reserve's overnight reverse repurchase (ON RRP) facility has dropped by close to 60 percent from its peak in December 2022. Much of this drop is attributed to an increase in Treasury bill issuance to refill the Treasury General Account (TGA) after the most recent debt-limit debate. However, the TGA is not expected to grow much more, suggesting the rapid decline in assets held at the ON RRP could slow." The overview states, "Since June 2022, the Federal Reserve has been working to remove policy accommodation by shrinking the size of its balance sheet. Substantial reductions in the balance sheet must come primarily through net reductions in one of three primary Fed liabilities: U.S. Treasury deposits at the Fed (the Treasury General Account or TGA), bank deposits at the Fed (reserves), or money market funds' 'deposits' at the Fed through the overnight reverse repurchase program (ON RRP). Thus far, the value of assets held in ON RRP has declined relatively rapidly, which may be encouraging for two reasons. First, the ON RRP has grown substantially over the last few years and become a dominant force in the money market fund industry. In the spring of 2021, the program began to steadily grow, surpassing $1 trillion in July and $2 trillion the following May. The program ultimately peaked in December with nearly $2.7 trillion in assets. Second, changes in the ON RRP may be more tractable than changes in the TGA or in reserves. The TGA, for example, is determined outside of the Fed through the political process. Further, while bank reserves will likely be an important part of future balance sheet reductions, reductions in the ON RRP are generally considered to represent a lower risk to the financial system than large reductions in bank reserves." It adds, "Since the debt-ceiling agreement was signed on June 3, the Treasury has been replenishing the TGA, with some of the money coming directly out of ON RRP. When money market funds purchase Treasury bills outright, instead of placing the same funds at the Fed, dollars shift from the ON RRP to the TGA (with little net effect on the Fed's balance sheet). As seen in Chart 1, drawdowns of the ON RRP have closely mirrored the runup in the TGA over the last several months. Similarly, as the supply of Treasury bills has increased by more than $1 trillion following the resolution of the debt-limit debate in May ... the assets under ON RRP have fallen by about $1 trillion. However, as of October 2023, the TGA stands at around $830 billion, above the Treasury's expectation of $750 billion by year-end (U.S. Department of the Treasury 2023). Thus, the recent rapid expansion in the TGA is unlikely to continue, limiting its ability to fuel further rapid reductions in the ON RRP."
