ON RRP Facility vs M2 Money Supply
ON RRP facility vs M2 money supply — what's happening to system liquidity?
One-year comparison
Left axis: M2 Money Supply (green) · Right axis: ON RRP Facility (blue)
The analysis
ON RRP balances are bank-reserve substitutes — when RRP drains, the cash either moves into bank reserves or flows into bills. M2 is the broad-money aggregate including household deposits. The 2022-24 RRP drain from $2.5T to near zero was the first leg of true QT; M2 contracted for the first time since WWII. Watch RRP for near-term liquidity; M2 for medium-term transmission.
Monitor the M2 money supply. Year-over-year contraction in M2 is a rare deflationary signal associated with severe economic stress.
Track the Federal Reserve's Overnight Reverse Repo facility. Declining ON RRP signals the financial system's liquidity buffer is thinning.