Fed Sells $1.15 Billion of Term Deposits in Auction
The U.S. Federal Reserve building stands in Washington D.C. Photographer: Melissa Golden/Bloomberg
The Federal Reserve said it sold $1.15 billion in deposits in the first test of a credit- tightening tool it may use to drain a near-record amount of cash from the banking system.
The Fed offered $1 billion for 14 days through its Term Deposit Facility and received bids worth $6.14 billion, the central bank said in a statement today. The successful banks will deposit money with the Fed from June 17, 2010, to July 1, and receive interest of 0.27 percent. Banks currently receive 0.25 percent in interest on their excess reserves.
Fed Chairman Ben S. Bernanke is planning to use the program, which he says is analogous to a bank certificate of deposit, to eventually help policy makers raise interest rates. With $1.05 trillion in excess reserves in the banking system, central bank officials are looking for new ways to help achieve their target rate for overnight lending among banks.
The auction “certainly drew enough interest from bidders,” said Thomas Simons, a money-market economist at Jefferies & Co. in New York, one of the 18 primary dealers that deal directly with the Fed. “I don’t see anything that indicates that there were any problems.”
The central bank aims to prevent excess reserves from stoking inflation. Fed officials pumped the cash into the banking system while expanding the central bank balance sheet to end the financial crisis.
‘Prudent Planning’
The tests “are a matter of prudent planning and have no implications for the near-term conduct of monetary policy,” the Fed said last month when it announced the schedule for the auctions.
The Fed also plans to use reverse repurchase agreements to reduce excess liquidity. In a reverse repo, the Fed lends securities for a set period, draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to the primary dealers.
“The use of reverse repos and the deposit facility would together allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so,” Bernanke told Congress in March.
The small size of the test makes it difficult to evaluate how auctions for a hundredfold more in deposits would work, Simons said. “I don’t know if an auction this small can give you a great handle on how things will go when the real pace of operations gets going.”
Tying up funds in the program should be attractive to banks that have been leaving their excess reserves idle, Simons said.
“I don’t really think that they’re concerned about not having the money available to make loans -- they’re not making too many loans right now,” he said.
Unprecedented Policy
At the April 27-28 meeting of the Federal Open Market Committee, the central bank signaled it’s not ready to begin its exit from its unprecedented expansionary policy. The Fed pledged to keep rates low for an “extended period.” The FOMC is next scheduled to meet in Washington June 22-23.
The Fed may conduct four additional tests of the program. An auction for 28-day deposits will be held June 28, and a sale of 84-day deposits will be held July 12. Two further tests may be scheduled later in the summer, the central bank said last month.
To contact the reporter on this story: Joshua Zumbrun in Washington at jzumbrun@bloomberg.net.
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