In the framework of ample reserves, why does the Fed have to use overnight Reverse Repos...

In the framework of ample reserves, why does the Fed have to use overnight Reverse Repos as a supplementary policy tool to support policy implementation when interest rate on reserves is the primary tool? In other words, why is interest rate on reserves is not sufficient by itself to influence the federal funds rate?

Expert Solution

Reverse repo rates are the rate at which banks lend to the fed. This is used when the fed wants to use contractionary monetary policy. That means when fed wants to suck out money from the economy. It borrows money from banks at reverse repo rate. Whereas repo rates are used in expansionary monetary policy. When banks borrow from the fed and fed wants to put liquidity(money) into the economy.

Reverse repo rates are also used as interest on excess reserves by banks or financial institutions. All this is done to keep interest rate in check.

Rahul Sunny answered 2 years ago

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