RRP facility drop stems from Treasury’s 5.4% bill funding, diverting funds. When RRP depletes, liquidity shortage may spike short-term rates, impacting asset classes.

by
Sharing is Caring!

by Virtual_Crow

The RRP facility is used to take excess liquidity out of the system. Banks have a ton of extra deposits that they would loan out, and if there’s too little demand for loans they’d loan it at less than 5% (for short term loans). The Fed doesn’t want that because loaned deposits multiply the money supply due to fractional reserve banking, so they pay banks 5.3% to borrow the money (and sit on it) overnight.

See also  Low-income Americans are still struggling after years of high inflation and elevated interest rates, and now they're starting to lose their jobs.

The reason the RRP facility is in free fall is because the Treasury is funding trillions of new borrowing with bills that pay 5.4%, so this money is going there instead.

A small part of the reduction may be depositors withdrawing money to go in the markets but it’s not the primary driver.

See also  Buying a home right now at these elevated prices makes absolutely zero sense with rates this high. You can smell the desperation of the agents any house you walk into.

When the RRP runs out, there is a shortage of liquidity to buy new bills, so short term rates will rise and every other asset class will see some liquidity move out of it.