What Happens When RRP Reaches Zero?

Apollo Chief Economist

The Fed’s Reverse Repo Program (RRP) is a measure of excess reserves in the banking sector. If banks have excess cash, RRP balances go up and vice versa.

With Fed cuts on the horizon, there is an emerging debate about what will happen once RRP balances reach zero, in particular if QT continues, see chart below.

The worry is that once there are no longer abundant reserves in the banking sector, then reserves will be scarce, and the consequences could be less support for T-bills, duration, and credit markets, or stresses in money markets similar to what we saw in September 2019.

The bottom line is that credit investors should keep an eye on RRP balances because as they are depleted, we will find out if reserves in the banking sector are scarce, abundant, or ample.

In short, once RRP reaches zero in May or June, there may no longer be abundant reserves in the banking sector, which increases the probability of an accident somewhere in the plumbing of the financial system.

When RRP balances reach zero in May or June, stresses could begin to emerge
Source: FRBNY, Haver Analytics, Apollo Chief Economist

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