How Central Banks Use Reverse Repos to Drain Liquidity

Monetary Policy Explained with Fexingo: Central Banks, Money Supply, and Interest Rates · Jun 17, 2026 · 10m · transcript

Lucas and Luna break down the mechanics of reverse repurchase agreements — how central banks like the Fed use them to soak up excess cash from the financial system without selling bonds. With short-term interest rates at 5.25–5.5% in mid-2026 and reserve balances still elevated from quantitative easing, the reverse repo facility has become a quiet but powerful tool for draining bank reserves and keeping the federal funds rate inside its target range. The episode walks through a concrete example using a bank, a money market fund, and the New York Fed's daily operations. Learn why the…