Cash is getting tight

The Fed operates two key facilities often referred to as “windows”: the Standing Repo Facility, or SRF, and the Overnight Reverse Repurchase Agreement Facility, or ON RRP. These are tools used to manage liquidity and influence short-term interest rates in the financial system. Through the SRF, The Fed provides short-term loans (repos) to eligible counterparties, typically primary dealers, by lending cash against high-quality collateral like Treasury securities. This injects liquidity into the market, helping to set a ceiling on short-term interest rates by ensuring rates don’t rise too far above the Fed’s target range. Through the ON RRP, the Fed absorbs excess liquidity by borrowing cash from eligible counterparties (like money market funds, banks, and others) in exchange for Treasury securities, with an agreement to repurchase them later. This sets a floor on interest rates, preventing them from falling too low. If you look at the chart below, you’ll see that the ON RRP is running very low. When that happens, it indicates that excess liquidity in the financial system is significantly reduced. It often reflects the Fed’s efforts to drain reserves (e.g., through quantitative tightening or higher interest rates), signaling tighter monetary conditions. This could push short-term rates higher as liquidity becomes scarcer. When Powell speaks today at Jackson Hole, take this into account because he may not indicate whether oficial rates will be lowered in September, but through the ON RRP, he’s pushing rates higher. Secretary Bessent understands this, but it’s very possible that Trump does not.

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