Central Banks Rely on Repos to Manage Liquidity and Implement Monetary Policy

Central banks around the world rely on repos to implement monetary policy and support market functioning. Repos allow central banks to inject liquidity into the banking system by purchasing securities from financial institutions, such as commercial banks or dealers, in exchange for newly created reserves.

The Federal Reserve, for example, uses repos to supply liquidity and dampen upward pressure on short-term interest rates. Since 2021, the Fed has conducted daily repos with primary dealers and eligible banks, providing a ceiling on overnight rates through its Standing Repo Operations (SRPs). These operations involve high-quality collateral and settle on the same day through the tri-party repo platform.

Central banks also use reverse repos to drain liquidity from the banking system. Reverse repos involve selling securities from their portfolios to financial institutions, converting reserves received as payment for the securities to a repo payable on their balance sheet. The Federal Reserve has conducted daily reverse repos at a rate set by the FOMC since December 2015.

The use of repos and reverse repos has evolved over time in response to shifting policy objectives and transformations in the financial system. When repos were first introduced as an alternative to bank advances in November 1917, participation was restricted to member banks transacting with their respective regional Federal Reserve Banks.