A reverse repurchase agreement, or reverse repo, is a financial transaction where one party sells securities to another party with the agreement to repurchase them later at a higher price. This process allows the seller to obtain short-term funding while the buyer earns interest on the securities during the holding period. Typically used by central banks like the Federal Reserve, reverse repos help manage liquidity in the financial system. By temporarily removing cash from the market, they can influence interest rates and stabilize the economy. This tool is essential for maintaining balance in monetary policy.