The Federal Reserve drained $1.02 billion in reserves from the banking system with tri-party reverse-repurchase agreements in an operational-readiness test of the tool as policy makers prepare for the eventual withdrawal of monetary stimulus.
The “small-value” transaction, part of a series of temporary open-market operations that began in 2009, didn’t signal any change in monetary policy, according to a statement posted Aug. 5 on the Fed Bank of New York’s website.
The central bank drained $2.26 billion in reserves Aug. 7 with tri-party reverse-repo agreements in another readiness test of the tool.
The Fed uses repos and reverse repos to help maintain the level of money in the banking system to keep overnight interest rates close to its target. The central bank has held the target rate for overnight loans between banks in a range of zero to 0.25 percent since December 2008.
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.
In a tri-party arrangement, a third party functions as the agent for the transaction and holds the security as collateral. JPMorgan Chase & Co. and Bank of New York Mellon Corp. are the only banks that serve in a trade-clearing capacity in the tri-party repo market.
The central bank’s large-scale asset purchases, known as quantitative easing, have swelled its balance sheet to more than $3.5 trillion, as policy makers have sought to reduce borrowing costs and stimulate growth. Fed officials have listed tri-party reverse repos as one tool they will use when they begin to drain cash in the banking system.