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Fed to Conduct Reverse Repo Tests as Part of Readiness

The Federal Reserve will conduct tri-party reverse repurchase agreements tomorrow to test one of the tools for an eventual withdrawal of the central bank’s unprecedented monetary stimulus.

The operations, part of a series announced in 2009, don’t represent any change in monetary policy, according to a Federal Reserve Bank of New York statement today.

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 the counterparties that act as counterparties to the central bank.

Policy makers led by Fed Chairman Ben S. Bernanke have been developing ways to eventually withdraw the cash they pumped into the financial system to combat the deepest recession since the 1930s. 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.

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