I keep seeing charts on twitter on how the Fed's reverse-repo facility being at an all time high is some sort of danger signal. I dug into it a bit and tried to figure out what exactly it is and why it matters here:
https://theory-a.com/blog/repo
and a tweet thread here: https://twitter.com/theory_a_com/status/1529611344030289920
My understanding is that the reverse-repo facility acts like a savings-account workaround for foreign entities who can't officially hold Federal reserves.
The “reverse repo” as a method of lending money to the Fed makes no sense since the Fed doesn't actually need money. However it does want to control the money supply and the RRP facility basically allows the Fed to incentivize foreign entities to keep their money parked instead of flowing or multiplying through the economy via loans. The RRP is used as a sponge to absorb money to try and quell inflation and cool down an overheating economy.
When a lot of money is flowing into the RRP it's a combination of both policy (high interest rates incentivizing money being parked) as well as fear since parking at the Fed is one of the safest things to do. When a lot of money is flowing into the RRP it's like a lot of ships returning to harbor. The crowd is signaling belief that a storm is coming.
One of the reasons RRP discussion comes with “end the Fed they suck!” is because of how hacky this workaround feels once understood. They are literally paying banks(and their executives) money to keep money(reserves) out of the economy. So from a layman's perspective, banker's are being rewarded for slowing down (but not stopping) the rate at which money/savings is melting but the method of slowing down this melting also might cause job/source-of-income loss.
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