The Fed’s Reverse Repo Program (RRP) is a monetary policy tool that allows eligible counterparties, such as money market funds, to lend funds to the Federal Reserve overnight in exchange for U.S. Treasury securities held by the Fed.
The RRP is designed to help the Fed control short-term interest rates by draining excess liquidity from the banking system and providing an alternative investment option for cash-rich investors. In the RRP, the counterparties deposit funds in the Fed’s account at an interest rate that is determined by the Fed, which currently serves as the floor for short-term interest rates. The counterparties receive the Treasury securities as collateral, which they can hold until the next business day when the Fed repurchases the securities and returns the funds to the counterparties with interest.
The RRP is considered to be a safe and low-risk investment option, as the Treasury securities held by the Fed are backed by the full faith and credit of the U.S. government.
