The Reverse Repo Drain: Excess liquidity fills all the cracks.

The Federal Reserve's Reverse Repo Facility (RRP) has acted as a massive liquidity buffer for the financial system since 2023. This wave of liquidty has benefited risk asset owners greatly. It was effectively the wind in the sails. Coupled with an exciting new technology and massive capex spending fueling technology stocks.

The Mechanism of Action

Contrary to the idea that liquidity flows were purely passive, the Federal Reserve actively accelerated the RRP drain in late 2024. As reported by Rueters following the December 18th meeting, the FED slashed the RRP offering rate by 30 basis points - deeper than the 25 bps cut to the Federal funds rate. This pinned the yield below what money market managers could obtain in the T-bill market. This action created a flood of liquidity into treasury markets and off the Federal Reserves balance sheet.

The RRP has now been effectively depleted, and this source of liquidity which was a tailwind now becomes a headwind for risk assets. To further the liquidity issues repo usage at the Federal reserve began to flash warning signs. At the December 2025 policy meeting the FED pivoted to reserve management purchases to stem the plumbing issue in the short term funding markets. Read the NY Fed FAQ. The FED blamed the funding issues on Reserve balances at the major financial institutions falling to what they call "less abundant". Curiously this all started to occur when First brands and Tricolor bankruptcies came to light. Read the Reuters Report

Chaos Theory Outlook

Less liquidity means increased volatility and an increased likelihood that the most speculative assets in financial markets will be the first to be affected. Keep an eye out for large bankruptcies and other credit events moving forward. I'd wager that the credit issues in October played a much bigger role than the Fed will care to publicly admit.