Instead, overnight, fixed-rate, full-allotment reverse repo operations with expanded counterparties, coupled with IOER available to banks, might enhance the Fed’s achievement of its policy objectives in this environment. Similar to IOER for banks, an overnight, fixed-rate, full-allotment reverse repo facility with same-day settlement would provide an essentially risk-free investment directly at a fixed rate, in this case to a broad range of non-bank counterparties. By reaching financial institutions that are ineligible to earn IOER, including, for example, money market funds, the facility widens the universe of counterparties that should generally be unwilling to lend at rates below those rates available through the central bank.14 The facility should also enhance competition in the markets by strengthening the bargaining position of non-bank lenders, which would now be able to place essentially unlimited funds overnight in the Fed’s facility.15 In this way, the facility is expected to complement IOER, strengthening the floor on the level of overnight rates and tightening the relationship among various money market rates. Such a facility might also be expected to help reduce the volatility of short-term interest rates. By conducting a daily operation with a known, fixed rate in unlimited amounts, the Fed can reduce uncertainty and absorb day-to-day variations in the supply of and demand for funds and collateral. An eligible lender that cannot earn the IOER rate and that has an unexpectedly large amount of funds to invest would be able to place the funds in the reverse repo facility rather than sell them in the market at an unusually low rate.

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