Reverse repos involve banks buying securities from the Fed in the evening, with the Fed agreeing to buy them back in the morning for another price. Until recently, the first price and second price were the same. Now, the second price is 0.05% higher (annualised).
Banks are parking a trillion dollars with the Fed overnight. That’s a trillion dollars that won’t be lent, i.e. won’t contribute to growth or inflation.
That seems good for our national budget unless I'm misinterpreting it.
And it's interest earned by the banks, not the Fed.
basically just means banks have way more cash than they know what to do with (due to fed policy), so they are parking it overnight at the fed for close to zero interest.
the fed introduced this program to prevent interest rates from going below zero. they are essentially a floor on the market. and soaking up excess short term liquidity.
What it indicates is what the Fed knows and has already signaled: monetary policy is going to be largely ineffectual in the near term.
The failure mode you're alluding to is a Keynesian liquidity trap [1], a sibling to stagflation (inflation and demand failure): deflation and demand failure.
The American economy shows no failure of aggregate demand. (Quite the opposite.) Inflation expectations are rising. And these reverse repo data shows banks relinquishing liquidity, not hoarding it.
More pointedly, this increase resulted from the FOMC increasing reverse repo rates. That's monetary policy causing intended effects.
FOMC repos and reverse repos predate ZIRP.