A single 1% hike in interest rates can suck as much cash out of the system as $429 billion just vanishing.
March 24, 2026
Original Paper
Repo and the Liquidity Risk Premium
SSRN · 6447978
The Takeaway
Central banks use both interest rates and cash reserves to manage the economy, but their relationship is usually seen as distinct. This paper calculates the exact 'exchange rate' between them, revealing the staggering scale of how small policy rate shifts impact market stability.
From the abstract
Securities dealers play a central role intermediating funds in the U.S. short-term money markets. This intermediation involves risk, which can be mitigated by holding buffers of liquid securities. The cost of holding these buffers-the liquidity risk premium-is driven by the opportunity cost of holding money and so is influenced by monetary policy. We use detailed data on the pricing of repurchase agreements (repo), the main contract used to provide secured funding in the money markets, to measur