New York Fed to start testing new repo tool to manage rates

Sept 20 Fri Sep 20, 2013 11:23am EDT

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Sept 20 (Reuters) - The New York Federal Reserve next week will begin tests of a new tool being developed to help it better control the level of short-term interest rates once the Federal Reserve finally starts to raise its official interest rate.

The New York Fed will start testing an overnight, fixed-rate full-allotment, reverse repurchase agreement facility in a series of daily operations, the bank said in a statement released Friday.

In reverse repurchase agreements, or reverse repos, the Fed will temporarily drain cash from the financial system by borrowing funds overnight from banks, large money market mutual funds and others, and offering them Treasury securities as collateral. Banks and the funds will receive a modest overnight interest rate, initially set at 0.01 percentage point, or 1 basis point.

The development of the facility was first revealed last month when the minutes of the Federal Open Market Committee's July meeting were released.

The Fed is not expected to start raising its official policy rate, the Federal Funds Target Rate, until 2015, according to interest rate futures markets. On Wednesday the bank defied market expectations and decided to keep pumping cash into the banking system through its quantitative easing program.

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