The Federal Reserve Bank of New York is testing an overnight fixed-rate reverse repurchase agreement facility that may be used to aid policy makers when they tighten monetary policy.
The tests, which are temporary open market operations, may extend through Jan. 29, the New York Fed said in a statement on Sept. 20.
Fed staff members presented officials the possibility of the facility at the Federal Open Market Committee’s meeting in July. The system would allow the central bank to offer an overnight, risk-free instrument to a “wide range of market participants,” and possibly improve its ability to keep short-term rates at desired levels, minutes from the gathering showed.
Fed policy makers, while still buying bonds to support the economy, have also been developing methods to eventually help withdraw record monetary accommodation. Along with raising the overnight bank lending rate, Fed officials have said they may use tools including reverse repos to withdraw or neutralize cash in the banking system.
In a reverse repo, the Fed lends securities for a set period, temporarily draining cash from the banking system. At maturity, the securities are returned to the Fed, and the cash to its counterparties.
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