The purpose of the [full-allotment overnight reverse repo] facility is to establish a floor on money market rates and to improve the implementation of monetary policy even when the balance sheet is large. Even if our balance sheet increases significantly further and stays very large for many years, it will be useful to have this facility available to improve monetary policy control.
After a quiet announcement on September 25 via their July 30-31 meeting minutes, the Federal Open Market Committee has implemented a test of a full-allotment overnight reverse repo facility. This facility is intended to exert more control over the money the Fed has been injecting into the financial system, and give them better influence over interest rates.
Federal Reserve Bank of New York President William Dudley stressed that this new facility should not be seen as a indication of change in monetary policy: “the testing and the development of the facility is not being undertaken to facilitate or expedite exit from our large balance sheet and should not be considered to be an element of the exit process.”
Reuters reports that the first test of the facility absorbed $11.81 billion in cash. In subsequent tests the Fed will expand participation beyond banks to buyside firms, including money funds and government-sponsored enterprises. According to Mr. Dudley, "This competitive effect could, in and of itself, put a stronger floor on money market rates."