Fed Drains $58.2 Billion in Test of Fixed Reverse Repos

The Federal Reserve Bank of New York drained $58.2 billion from the banking system, the largest amount yet in a test of a fixed-rate reverse repo facility that began operation last week.

“The increase in the allotment size today is related to quarter-end, as this facility is a convenient place for investors to put their cash,” said Andrew Hollenhorst, fixed-income strategist at Citigroup Inc. in New York. “The Fed wanted to test how much this facility would be used at quarter-end, when dealer balance sheets come under a little bit of pressure, making it harder for them to take cash in the repo market. This makes placing cash at the Fed an attractive investment alternative.”

The program 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 Fed allotted $9.4 billion in reverse in the inaugural test on the facility on Sept. 26 and $16.622 billion the next day, when the maximum bid amount was doubled to $1 billion for eligible counterparties. The collateral for the transactions has been limited to Treasury debt.

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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