NEW YORK, May 8 (Reuters) - U.S. policy-makers are still considering the role of the Federal Reserve’s reverse repo facility for whenever it decides to begin raising short-term interest rates, Philadelphia Federal Reserve President Charles Plosser said on Thursday.
The U.S. central bank has ramped up its testing of this program, in which it exchanges Treasuries securities it owns with cash from banks, money market mutual funds and mortgage finance agencies to determine the effectiveness of draining money from financial markets. Less cash in the banking system would help the Fed achieve its interest rate target.
Some analysts wonder whether the interest rate the Fed pays on its reverse repos to the participants could become more important than the traditional interest rate in the federal funds market where banks lend their excess reserves to one another.
“The fed funds market is awkward right now because we flooded it with so much reserves,” Plosser told reporters after a speech at the Council on Foreign Relations here.
Fed policy-makers are discussing how the reverse repo rate, currently at 0.05 percent, might help them to achieve its rate target, Plosser said.
He suggested perhaps the reverse repo rate might a “supplement” rate. (Reporting by Richard Leong; Editing by Chizu Nomiyama)