Federal funds sold under agreements to repurchase, commonly known as repo agreements, are a type of short-term borrowing between banks and other financial institutions. In a repo transaction, one party sells an asset, typically a government security, to another party with an agreement to repurchase it at a higher price at a later date.

These agreements allow financial institutions to obtain short-term financing and meet regulatory requirements for cash reserves. They also provide a way for institutions with excess cash to earn interest on their funds.

Federal Reserve banks engage in repo transactions as a way to manage the money supply and interest rates. By buying government securities and offering repo agreements, the Federal Reserve can increase the money supply and lower interest rates. Conversely, by selling securities and taking part in repo agreements, the Federal Reserve can decrease the money supply and raise interest rates.

Overall, repo agreements serve an important function in the financial system by providing a means of short-term financing and liquidity management. However, they also carry some risk, particularly for the party selling the asset in the transaction. If the party buying the asset fails to repurchase it at the agreed-upon price, the seller may be left with a loss.

In recent years, the use of repo agreements has come under increased scrutiny due to concerns about their role in the 2008 financial crisis. Some critics argue that the use of repo agreements contributed to the crisis by allowing financial institutions to take on excessive leverage and risk.

Despite these concerns, repo agreements remain an important tool for financial institutions and the federal government. As such, they are likely to continue to play a crucial role in the financial system for years to come.