UPDATE 1-Fed to test revised term deposit facility next month, allowing banks early withdrawal

Thu Sep 4, 2014 10:50am EDT

(Adds details on timing, rates)

WASHINGTON, Sept 4 (Reuters) - The U.S. Federal Reserve will test a revised term deposit facility starting in October to let banks who use the one-week deposits withdraw the money early if they need it, the Fed announced on Thursday.

The Fed said it "currently anticipates" that banks would pay a penalty for early withdrawal of 0.75 percentage point on an annualized basis, as well as surrender any interest earned.

The term deposits are one of several tools the Fed is testing as a way to regulate interest rates once it begins raising rates from the near-zero level where they have been for nearly six years.

The term deposits are a way for the Fed to siphon money from the financial system, offering banks a small rate of interest of around 0.26 percentage point on an annualized basis, in return for making one-week deposits with the central bank.

The early withdrawal feature loosens the rules so that banks can have access to their cash if they choose. The Fed said it will conduct eight term deposit operations on a weekly basis, starting in October and running into November.

The term deposits have proved increasingly popular in the tests the Fed has run so far. It conducted 13 of the one-week operations this year. The first drew $12 billion in deposits while the final one, in July, attracted $152 billion.

(Reporting By Howard Schneider; Editing by Andrea Ricci)

FILED UNDER: