Sept. 26 (Bloomberg) -- The Federal Reserve Bank of New York completed a test of an overnight fixed-rate full allotment reverse repurchase agreement facility that may be used to aid policy makers when they tighten monetary policy.
The Fed allotted $9.4 billion in overnight reverse repos through the facility at a fixed-rate of 0.01 percent. The operation was open to the Fed’s 139 tri-party reverse repo counterparties, which includes 94 money market mutual funds, six government-sponsored entities, 18 banks and the Fed’s 21 primary dealers. Each eligible counterparty was limited to a maximum bid amount of $500 million. The collateral for the transactions was limited to Treasury debt.
“This exercise is not intended to materially affect the current level of short-term interest rates,” the New York Fed said in a statement on Sept. 20. “This work is a matter of prudent advance planning” and “do not represent a change in the stance of monetary policy,” the statement said.
The New York Fed said in a separate statement today that it plans to increase the maximum bid amount to $1 billion from $500 million, beginning with tomorrow’s operation.
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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