Fed Allots $16.6 Billion in Test of Fixed Reverse Repo Facility

The Federal Reserve Bank of New York allotted $16.622 billion in a test of an overnight fixed-rate reverse repurchase agreement facility that may be used to aid policy makers when they tighten monetary policy.

The operation at a fixed-rate of 0.01 percent 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. The New York Fed increased the maximum bid amount to $1 billion from $500 million, beginning with today’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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