Federal Reserve Widens Reverse Repo Rate Cut to Encourage Liquidity Shift
The Fed lowers the reverse repo rate by 30 basis points, a larger reduction than the federal funds rate cut, as part of its quantitative tightening strategy.
- The Federal Reserve has reduced the reverse repo rate to 4.25%, a 30 basis point cut, while lowering the federal funds rate target range by 25 basis points to 4.25%-4.5%.
- This move aims to make the reverse repo facility less attractive, encouraging money market funds and others to seek better returns in private markets.
- The reverse repo facility, which peaked at $2.6 trillion in late 2022, has been shrinking but remains above $100 billion, contrary to Fed policymakers' goal of near-zero balances.
- Analysts view this adjustment as a step towards concluding the Fed's balance sheet reduction, which has already decreased from $9 trillion to $7 trillion since 2022.
- Challenges such as year-end market volatility and potential government financing issues in 2025 could complicate the Fed's efforts to finalize its quantitative tightening process.
