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Representatives Question Utility of Reverse Repo Facility

Representatives Patrick McHenry and Scott Garrett, respectively chairs of the House Committee on Financial Services’ Subcommittee on Oversight and Investigations and Subcommittee on Capital Markets and Government Sponsored Enterprises, sent a letter to Fed Chair Janet Yellen last week questioning the need for the Federal Reserve’s Overnight Reverse Repurchase Facility (RRP). The facility, which uses what are commonly known as “overnight reverse repos,” receives cash from program participants in exchange for one-day loans of Treasury securities. The letter noted that the authors supported the Fed considering “as many options as possible to reverse its course of excessive monetary policy accommodation, we have considerable concern that use of RRP could have significant negative impact on the U.S. economy.”

The letter cited concerns about the facility from the Sheila Bair, former chair of the FDIC, and the William Dudley and Eric Rosengren, respectively presidents of the New York and Boston Federal Reserve Banks. Bair had questioned the use of the facility and suggested that the Fed “lock up the reverse repurchase facility in its toolbox and throw away the key.” Dudley and Rosengren, on the other hand, cited the risks of an unlimited facility.

The representatives applauded the Fed’s decision to cap the facility at $300 billion per day, but urged Yellen to end use of the RRP by the end of the year. The letter also included a list of questions regarding the Fed’s authority for establishing the facility, future plans for its use, and potential risk areas. The letter can be found here.