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
The statement sparked some selling of short-dated
Treasuries, though some traders said that fears over the
application of the facility were probably overstated as it is
unlikely to be implemented for some time.
Six-month Treasury bill yields rose to 5 basis
points on Friday, from 3.5 basis points on Thursday.
In reverse repurchase agreements, or reverse repos, the Fed
temporarily drains 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 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 tool is designed to mop up excess cash in the financial
system, which if left unchecked could keep rates lower than
perhaps desired by the Fed at a later date. If successful, it
could smooth what may be a rocky transition to tighter monetary
policy when the U.S. central bank finally decides the economy is
strong enough to withstand higher interest rates.
Years of pumping so much money into the market has left it
awash in bank reserves, an unprecedented situation that has
sowed concern that a policy turn will not be so easy and could
distort key money markets.
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.