One of the tools the Federal Reserve utilizes to constrain interest rates are Repurchase Agreements. This are know as Repo and Reverse Repo facilities. Reverse Repo allows the Federal Open Market Committee (FOMC) to effectively create an interest rate floor by offering participants Fed assets to purchase for a typically short period of time with the agreement to purchase the securities (typically Treasuries) back and paying the participant interest for doing so. These actions are carried out by the New York Fed Open Market Trading Desk. As the Effective Funds rate climbs, the amount paid in interest must increase for a floor to be maintained as use of this facility means there is likely too much liquidity in the system. However, there are some potential catastrophic effects from the high current utilization of this facility. The Fed is well aware of this risk but will hold it back as long as possible to avoid a panic.
