Moved From Comments: QE and primary dealer mechanics
Does the Fed primarily purchase from primary dealers or institutional investors when aiming to increase deposits through asset purchases?
How do banks interact with money funds? Does each money fund have a bank account that receives reserves for it on its behalf before it invests and transfers it out via Fedwire Funds? Does that imply if there was no RRP facility to extinguish reserves, that the reserves a bank tried to get rid of by buying a money fund would just be moved to another bank that banked the money fund and then onto a borrower, and may even come back to the same bank by a depositor that obtained funding from the money fund since reserves cannot leave the system unless the Fed wants it to?
In other words, there is a hot potato effect where no matter how much banks try to deploy reserves into securities, other banks must be receiving reserves and no one can get rid of them completely, so there continues to be an elevated amount on average across the whole system and asset prices increase ever higher since the same rese
Fed only buys through primary dealers. Institutional investors sell to primary dealers, who can in turn sell to Fed.
A money fund is a non-bank, and stands in the same position as you or I. The money fund deals in bank deposits, while the reserves aspect is basically a back office function that the bank worries about eg settling payments, managing inflows/outflows.
Yes you are right that there is a hot potato effect where banks buying securities simply push reserves to another bank. The constraint here is usually capital and leverage ratios.