Courtesy of Pam Martens
New York Fed Headquarters Building in Lower Manhattan
During the financial collapse of 2008, money market funds found themselves holding toxic paper that no one wanted to buy. In order to stop panic runs on money market funds, on September 19, 2008 the U.S. Treasury Department issued a statement indicating it would guarantee more than $3.5 trillion in money market funds.
As COVID-19 concerns took root in March of last year and the stock market plunged, the Fed launched another bailout program for money market funds on March 18, 2020. The program was called the Money Market Mutual Fund Liquidity Facility (MMLF) and was run out of the Federal Reserve Bank of Boston.
Going forward, the Fed does not want to be in the position of having to bail out more privately owned money market funds. So the Fed has been seducing money market funds and other financial institutions to use its Overnight Reverse Repurchase Agreement facility for the assets they need to keep both safe and liquid. The Reverse Repo facility is known internally at the Fed as the ON RRP.
A Reverse Repo transaction occurs when the Open Market Trading Desk at the New York Fed sells a security (typically a Treasury security) to one of its approved counterparties with an agreement to repurchase the same security at a specified price at a specific time in the future, typically the next day. The difference between the sale price and the repurchase price, adjusted for the length of time between the sale and purchase, is the implied rate of interest.
The Fed’s seduction program has taken a number of forms since March of this year:
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