The Federal Reserve has reduced a tool rate used to control the benchmark rate, aiming to maintain smooth operations in the U.S. financing markets. According to a policy statement, officials lowered the overnight reverse repurchase (RRP) agreement tool rate by 5 basis points relative to the lower bound of the target range. With the federal funds rate now set at a target range of 4.25%-4.50%, the new RRP rate stands at 4.25%, aligning with the lower bound for the first time since 2021.
The New York Fed reports that financial institutions currently hold approximately $132 billion in cash in the Fed's overnight RRP tool, providing money market investors with alternative investment options to support overnight rates. The tool's balance peaked at $2.55 trillion at the end of 2022. Wall Street uses this balance to assess excess liquidity in the U.S. financial system, indicating how much the Fed can reduce its balance sheet through quantitative tightening.
Market observers suggest this move may exert downward pressure on money market rates, affecting the amount of funds stored in the Fed's tool.
