Whenever the effective Fed funds rate drops too much, the Federal Reserve will conduct overnight reverse repurchase agreements where it will sell treasury securities to the market in exchange for cash. This will push up the Fed funds rate temporarily.
A rise in overnight reverse repurchase agreements (RRP) indicates that there is too much liquidity and tells us that the U.S. dollar is about to get weaker on lower Fed funds rate pressure. When banks have too many reserves, this harms their capital ratios as reserves have a non-interest expense to it.
For example, In May 2021, there was an excess amount of bank reserves parked at the Fed (and increased cost associated with it), pressuring the Fed funds rate lower and the IOER higher. The RRP purchases skyrocketed to keep a lid on excess reserves. There is a counterparty limit of $80 billion.
