Insights from MMF Portfolio Allocations amid Balance Sheet Normalization

In June of 2022, the Federal Reserve (Fed) began to reduce its securities holdings and decrease the size of its balance sheet, a process known as balance sheet runoff. The decline in the Fed's assets mechanically results in a decline in Fed liabilities, and on net since June 2022, most of the decline in securities holdings has been associated with a decline in use of the Fed's overnight reverse repurchase (ON RRP) facility, a facility in which eligible counterparties are able to enter into an overnight reverse repo agreement with the Fed, earning the ON RRP rate on funds held at the facility. While daily take-up at the ON RRP facility remained elevated above $2 trillion between the start of balance sheet runoff in June 2022 through May 2023, starting in June 2023, take-up at the ON RRP facility began to decline sizably, with lower ON RRP take-up driven primarily by money market mutual funds (MMFs) reallocating cash out of the facility.2