Repos are a common secured money market transaction. In a repo transaction, the Federal Reserve purchases securities from investors who agree to resell the securities later at a higher price (repurchase price). Each repo transaction is similar to a loan collateralized by securities and temporarily increases the supply of reserve balances in the banking system. Conversely, in a reverse repo transaction, the Federal Reserve sells securities to investors and agrees to repurchase the securities later. Reverse repo transactions temporarily reduce the supply of reserve balances in the banking system
The WSJ runs a story on 8/8/2021 (please find the article “Cash Is Flooding Into Short-Term Markets Like Never Before. Is That a Bad Sign?” under the reading assignment folder) about the money markets and Federal Reserve Policy. The article states that an unusual surge of short-term lending by cash- rich companies is raising concerns on Wall Street that a period of unrest may lie ahead. Investors such as money-market funds and banks are parking over $1 trillion in spare cash overnight at the Federal Reserve. That is the most on record since the Fed opened its facility for this reverse repurchase agreement in 2013.
Based on the article and your research, please discuss possible reasons banks hold this cash and park it with the Fed. Why does Fed Reserve expand its reverse reop borrowings recently? How does it impact inflation?
