Where did all this cash come from

…and what would happen if it left The Fed.

It was less than $1 trillion two years ago and is now around $2.4 trillion. Expensive to service at the overnight rate. The Fed’s got a “tiger by the tail”.

It just gets crazier!


That is how the FED works.

It is not crazy. It has been going in different ways with all sorts of amounts of money for close to 100 years. The better part of 100 years depending on the date the FED matured into this practice.

Adding…going by those numbers the banking crisis is drying up. Yes commercial paper will fail but most banks wont.

These reverse repo operations are widely used by money market funds. As the Fed raised rates, people moved over $600 billion out of banks (which paid little or no interest on savings accounts) into money market funds.

The chart shows the growth in the RRPs during this movement.


It is a really weird scenario. Large banks and investment firms are basically paying people to move money from their own savings accounts to FDIC insured money market accounts paying over 4%.

But! They appear to be turning around and simply depositing that money with the Fed and earning 5.15% (as of 5/4) and collecting the spread.


But is this being done on purpose to keep that money out of the economy? Imagine that amount of money flooding into the US economy at the same time.

No, this doesn’t keep money out of the economy. These are overnight reverse repos for totally liquid money market accounts. They are M1, as instantly spendable as cash.


The point is that it is not spent as cash but is earmarked for the Fed. It is spendable but won’t be.

The higher interest rate is used to slow spending, it can be called an opportunity cost.

This situation is also slowing lending.

The Federal Reserve has seen the problem here and has started taking action:

On April 25, 2023, the Federal Reserve Bank of New York (“FRBNY”) announced changes to its eligibility criteria for access to the Overnight Reverse Repo Facility (“RRP”).) These changes may prevent certain money market mutual funds from placing funds with FRBNY and force them to deploy funds directly in investment securities or a traditional bank account.

They will need to tread carefully unwinding $2.4 trillion!


Odd problem for those MMF to have. The markets are not attractive.