Banks’ Balance‑Sheet Costs and ON RRP Investment
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Daily investment at the Federal Reserve’s Overnight Reverse Repo (ON RRP) facility increased from a few billion dollars in March 2021 to more than $2.3 trillion in June 2022 and has stayed above $2 trillion since then. In this post, which is based on a recent staff report, we discuss two channels—a deposit channel and a wholesale short-term debt channel—through which banks’ balance-sheet costs have increased investment by money market mutual funds (MMFs) in the ON RRP facility.
Pricing Liquidity without Preemptive Runs
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Prime money market funds (MMFs) are vulnerable to runs. This was dramatically illustrated in September 2008 and March 2020, when massive outflows from prime MMFs worsened stress in the short-term funding markets and eased only after taxpayer-supported interventions by the Treasury and the Federal Reserve. In this post, we describe how mechanisms like swing pricing that charge a price for liquidity can reduce the vulnerability of prime MMFs without triggering preemptive runs.