Reverse Repurchases Soar Amidst Pandemic
Since 2008 the Fed changed how it conducted monetary policy. It started paying interest on reserves and did more reverse repurchase agreements. This is when the Fed sells a security to an eligible party (often financial institutions that do not have a reserve account at the Fed) with the agreement to buy it back the next day for a different price. Essentially it is a very short-term loan to the Fed, where the interest rate is pays is the difference between the sale and repurchase price. The more reverse repos, the more the Fed is reducing the money supply. Before the pandemic it was a small part of the Fed's operations. But during the pandemic the number of repurchase agreements soared to more than $1 trillion. Similar to paying interest on reserves, this is a different way to conduct monetary policy that could have implications for market dynamics as the Fed attempts to tackle inflation next year.
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