What is the Federal Reserve's repurchase agreement? Simply put, it is the liquidity regulator held by the Federal Reserve.

The operation logic is straightforward. The Federal Reserve buys securities such as government bonds and MBS from traders, while agreeing to buy them back at a later date — this is called a repurchase agreement. Essentially, the Federal Reserve is lending money, injecting funds into the market through this operation. Conversely, when there is excess liquidity that needs to be withdrawn, the Federal Reserve sells securities with an agreement to repurchase, which is called a reverse repurchase agreement, serving to absorb liquidity.

Why is this so important? Because the financial market is like the human blood circulation — funds must always remain fluid. When the market faces a liquidity crunch, interest rates tend to soar, interbank borrowing costs rise, and the entire financial system can come under pressure. Conversely, if there is too much money, interest rates can be suppressed, and asset prices may skyrocket.

Through precise repurchase and reverse repurchase operations, the Federal Reserve can, like adjusting temperature, find a balance point between these two extremes — maintaining stable interest rate fluctuations while ensuring the stable operation of the financial system. Whether for daily fine-tuning or emergency market stabilization during crises, this is the most commonly used tool in the Federal Reserve's toolkit.