Sept 20 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
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
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.