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The reverse repo facility acts as a way for counterparties, most often money market funds, to park cash overnight at the Fed and earn an interest rate tied to the fed funds rate.
Currently, the New York Fed has over $2 trillion of cash parked in its facility. As the first chart below shows, this amount of capital has remained elevated.
The next chart shows the total eligible counterparties able to park capital at the Fed. The overwhelming majority (105 out of 136) are money market funds.
Breaking this down even further, over 94% of all reverse repo capital is held by money market funds.
With the overwhelming majority of counterparties being money market funds, just how much of total money market fund assets are in reverse repo?
As of October (most recent data), money market funds had $5.2 trillion in assets. $2.3 trillion of this, or over 44%, is parked at the Fed.
As QT draws more capital out of the financial system, the Fed is banking on money flowing out of the reverse repo facility and into bank reserves. Yet, as the last chart shows, the spread between bank deposit rates and money market funds has remained wide, providing no incentive to shift money out of RRP.
However, as the Wall Street Journal noted this week, Americans seem to be keeping their savings as bank deposits rather than moving to money market funds.
Since the start of 2019, Americans have lost out on at least $291 billion in interest by keeping their savings in the five biggest banks. That total balloons to $603 billion when going back to 2014, when the FDIC started tracking consumer deposits in money-market and other savings accounts. And U.S. savers have likely missed out on much more than $600 billion because the average rate the five biggest banks have paid over the past eight years, 0.24%, includes higher-yielding money-market accounts and some business accounts. Traditional savings accounts paid an average rate of 0.02% at the five largest banks during that period. The FDIC doesn’t separate traditional savings and money-market deposits in its record-keeping.
While valuable capital remains tied up in RRP, reserves are much more plentiful now than in previous moments of liquidity stress. Liquidity issues might arise from abnormal stress, yet significant attention is being devoted to avoid repeating 2019 mistakes.