A key facility the Federal Reserve uses to help control short-term interest rates saw record inflows on Friday, the final trading day of the year.
took in $2.554 trillion in cash from money market funds and other eligible financial firms, besting the prior high water mark seen on Sept. 30, when inflows totaled $2.426 trillion.
The cash surge was almost certainly tipped into record territory on a typical quarter end pattern which can be further exacerbated on the year end. On those dates, for a variety of reasons, many financial firms prefer to park cash at the central bank rather than in private markets. The Fed’s reverse repo facility has been very active for some time. After seeing almost no uptake for an extended period, cash began to gravitate toward the central bank in the spring of 2021 and then grew consistently.The reverse repo facility takes in cash from eligible financial firms in what is a de facto loan from the Fed. The current rate stands at 4.3%, which is a return that often bests private sector short-term lending rates.
The reverse repo facility is designed to provide a soft floor for short-term rates and the federal funds target rate, the Fed's main tool to achieve its job and inflation mandates. To set the high end of the range, the Fed also pays deposit taking banks to park cash at the central bank, with itsThe federal funds rate is currently set at between 4.25% and 4.5% and traded at 4.33% as of Friday, bound between the reverse repo and interest on reserve balances rates.
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