The repo rate will be slightly below the federal funds rate because a repo involves collateralized borrowing, while a federal funds transaction is unsecured borrowing.

Question

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A repo involves borrowing money with collateral, while a federal funds transaction is unsecured borrowing, which means that the lender has no collateral to protect them in case the borrower cannot pay back. Because of this added risk, the federal funds rate is typically slightly higher than the repo rate.

The Repo Rate Will Be Slightly Below the Federal Funds