Fed Begins Adding Reserves to Banking System With Repo Agreement

The Federal Reserve is adding reserves to the banking system through a repurchase agreement as part of a program to test its operational readiness.

The transactions, part of a series of temporary open-market operations that began in 2009, don’t represent any change in monetary policy, according to an Aug. 2 statement on the Federal Reserve Bank of New York’s website. The central bank added $210 million in reserves Aug. 3.

In repos, the Fed buys securities from its 21 primary dealers for a set period, raising the amount of money available in the banking system temporarily. At maturity, the securities are returned to the dealers, and the cash to the Fed. In a reverse repo, the opposite occurs.

The Federal Open Market Committee authorized the New York Fed in June to undertake repos and outright purchases and sales of securities, in addition to reverse repos, to test readiness. The repo last week was the first by the central bank since December 2008.

In the past three years, it has added six primary dealers and several system changes as well as adjustments to support the reform of the tri-party repo market.

The Fed has previously used repos and reverse repos to help maintain the proper level of money in the banking system to keep overnight interest rates near the central bank’s target. The Fed has held its target rate for overnight loans between banks in a range of zero to 0.25 percent since December 2008.

In a tri-party arrangement, a third party acts as the agent for the transaction and holds the security as collateral. JPMorgan Chase & Co. and Bank of New York Mellon Corp. (BK) are the only banks that serve in a trade-clearing capacity in the tri- party repo market.

To contact the reporter on this story: Lindsey Rupp in New York at lrupp2@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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