Policy Tools
Overnight Reverse Repurchase Agreement Operations
The Federal Open Market Committee (FOMC) conducts overnight reverse repurchase agreement (ON RRP) operations as needed as a supplementary policy tool to help control the federal funds rate and keep it in the target range set by the FOMC.
When the Federal Reserve conducts an ON RRP operation, it sells a security to an eligible counterparty and simultaneously agrees to buy the security back the next day. This transaction does not affect the size of the System Open Market Account (SOMA) portfolio, but there is a reduction in reserve balances on the liability side of the Federal Reserve's balance sheet and a corresponding increase in reverse repo obligations while the trade is outstanding.
The ON RRP offering rate plays a role for ON RRP counterparties that is similar to the role played by the interest rate on excess reserves for depository institutions. That is, in general, any counterparty that can participate in ON RRP operations should be unwilling to invest funds overnight with another counterparty at a rate below the ON RRP rate, just as any depository institution eligible to earn interest on reserves should be unwilling to invest funds overnight with another counterparty at a rate below the interest rate on excess reserves. The Federal Reserve currently conducts ON RRP operations with many counterparties, covering a wide range of entities (the list of ON RRP counterparties is available here).