Reverse Repo: From $2.5T to Near Zero

How the Overnight RRP Works

The RRP rate is set as part of monetary policy. When it is competitive with other short-term investments, counterparties prefer the risk-free overnight return at the Fed over lending in private markets.

01 Who Parks Cash Here and Why

Three types of institutions have access to the overnight RRP: money market mutual funds, primary dealers, and government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac.

Money market funds dominate. At peak usage, they accounted for over 90% of total RRP balances. These funds manage trillions in cash for institutional and retail investors who need safety and daily liquidity. Government money market funds became heavy RRP users after 2021 because the facility paid better yields than Treasury bills while carrying zero credit risk.

Primary dealers - the roughly two dozen large banks that trade directly with the Fed - use the RRP too, but in smaller volumes. Their RRP usage tends to spike at quarter-end when balance sheet constraints push them to park cash overnight rather than hold it on their books.

The dynamic is straightforward. When the RRP rate exceeds what counterparties can earn elsewhere in short-term markets, money flows into the facility. When Treasury bill yields rise above the RRP rate, money flows out. That spread between the RRP rate and bill yields drives the balance up or down by hundreds of billions.

02 The $2.5 Trillion Build-Up (2021-2022)

Before 2021, the RRP balance was negligible. It rarely exceeded $300 billion and often sat near zero. Then pandemic-era quantitative easing changed everything.

The Fed purchased roughly $4.6 trillion in assets between March 2020 and March 2022 (Fed balance sheet data). Those purchases created new bank reserves. But loan demand did not absorb the flood of new deposits, and the Treasury reduced bill issuance as it spent down its cash balance. Money market funds had nowhere to deploy the cash at a competitive yield.

The RRP became the default destination. Funds parked cash overnight at the Fed, earned a small but risk-free return, and repeated the process every business day. The balance climbed steadily through 2021 and 2022.

$2.554 trillion on December 30, 2022

The single-day peak for the Overnight Reverse Repo Facility (NY Fed daily operations data). Over 100 counterparties participated that day. The balance represented money that existed in the financial system but was not available for lending, investing, or circulating through the economy.

That $2.55 trillion sat idle at the Fed while risk assets struggled through one of the worst years in recent memory. The money existed on paper but was not lending, investing or circulating, and standard market dashboards did not surface it.

03 The Drainage (2023-2025)

Starting in mid-2023, the US Treasury ramped up bill issuance. New 4-week, 8-week, and 13-week bills offered yields that competed with the RRP rate. Money market funds shifted cash out of the RRP and into these newly available bills.

The mechanics matter. Each dollar leaving the RRP re-entered the private financial system. When a money market fund bought a Treasury bill instead of parking at the RRP, that dollar went to Treasury. When Treasury spent it - on defense contracts, Social Security payments, infrastructure projects - the dollar entered the real economy. The RRP drainage was a liquidity injection by a different name.

The drawdown was steady and large. From $2.55 trillion in December 2022 to under $500 billion by mid-2024. To under $200 billion by late 2024. The pace averaged roughly $100 billion per month for over a year.

The timing aligned with broad risk asset appreciation. The S&P 500 gained over 40% from its October 2022 low through mid-2024. Bitcoin moved from $16,000 to over $70,000 during the same period. While correlation does not prove causation, over $2 trillion re-entered private markets over the same period.

RRP Balance Trajectory (2021 - 2025)

Source: FRED RRPONTSYD. Bars represent approximate monthly average balances. Peak: December 30, 2022 at $2.554 trillion.

04 Connection to Net Liquidity

The RRP is one of three components in the net liquidity formula that macro analysts and AI agents use to gauge financial conditions.

Net Liquidity = Fed Balance Sheet - RRP - TGA

A rising RRP directly reduces net liquidity, even if the Fed's balance sheet stays unchanged. A falling RRP increases net liquidity by the same amount.

During 2022, the RRP was the dominant variable in the formula. The Fed balance sheet was roughly stable (QT had just started), and TGA fluctuations were moderate. The RRP swing from near zero to $2.55 trillion accounted for most of the net liquidity contraction.

During 2023-2024, the same dynamic reversed. The RRP drainage of over $2 trillion offset much of the Fed's quantitative tightening. Net liquidity stayed elevated even as the balance sheet shrank, because RRP was falling faster than the balance sheet.

That made the RRP the swing variable - the component that determined whether overall conditions were tightening or loosening. Any system tracking net liquidity that only updated weekly on the Fed balance sheet release would miss billions in daily RRP moves, potentially misclassifying the liquidity regime entirely.

05 Where It Stands Now

The reservoir is effectively drained. RRP balances in the first quarter of 2026 sat near zero: under $10 billion on 58 of its 61 reported days, and under $1 billion on 25. That is down over 99% from the peak. A small residual balance persists because some counterparties use the facility for operational reasons regardless of rate spreads.

A near-zero RRP changes the liquidity calculus. The $2+ trillion that RRP drainage returned to markets is spent, and net liquidity now moves with the other two variables: Fed balance sheet policy and TGA dynamics (debt ceiling, spending patterns, tax receipts).

With the RRP near zero, its daily moves no longer swing net liquidity the way they did in 2023 and 2024. PreReason's Macro Liquidity briefing reports each component with its own 7, 30 and 90 day changes, so this shift shows in a single call.

PreReason API - RRP metric

get_metric rrp (MCP), as served on October 12, 2026
# Reverse Repo (RRP)
**Signal:** below-trend (Very High, 90/100)
**Trend:** falling | 7d: -80.0% | 30d: -30.6%
**Momentum:** accelerating - Accelerating downward: recent losses exceeding the longer term pace
**Percentile:** 8th all-time (extremely low)
Reverse repo at $300.00M; 7d -80.0% (falling), 30d -30.6%, 90d -45.0%. Releasing liquidity into system.
*Source: NY Fed Markets API | Updated: 2026-10-09T00:00:00+00:00 | 3 days ago*

A sustained move back above $300-400 billion would mean money flowing back into the facility, and out of private markets.

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