Higher rates fail to boost demand at Fed's reverse repo test

NEW YORK Mon Oct 21, 2013 2:37pm EDT

NEW YORK (Reuters) - The U.S. Federal Reserve on Monday doubled the interest rate on overnight loans it pays Wall Street dealers and money market funds, but it did not generate much additional interest from them.

The latest round of testing of this fixed-rate, reverse repurchase agreement program, which began about a month earlier, is to prepare for the time when the Fed moves away from its current near-zero interest rate policy. This reverse repo operation is aimed to help the Fed to reduce cash in the financial system and to achieve its interest rate target.

Fourteen bidders participated at the latest reverse repo test. They lent $4.876 billion to the Fed which backs the loans with the Treasuries it owns at an interest rate of 0.02 percent.

On Friday, nine bidders lent the Fed $4.221 billion for the weekend at an interest rate of 0.01 percent.

"As an operational readiness exercise, this work is a matter of prudent advance planning by the Federal Reserve. These operations do not represent a change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future," the New York Federal Reserve said in a statement on Friday, about Monday's rate increase on reverse repos.

(Reporting by Richard Leong; Editing by Diane Craft)

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