NEW YORK Nov 1 The Federal Reserve Bank of New
York said on Friday it would raise to 0.03 percent from 0.02
percent the fixed rate offered in its "operational exercise" for
a proposed facility to better control short-term borrowing
The branch of the U.S. central bank started testing the
proposed tool - called an overnight, fixed-rate full-allotment,
reverse repurchase agreement facility - in September. Fed
policymakers are considering giving it the go-ahead as a new
tool that could help them smooth market rates when the time
comes to tighten monetary policy.
The New York Fed has been conducting "readiness" operations,
it said on Friday. On Monday, it will raise the rate by 1 basis
point; no other changes will be made.
The exercise involves dealer banks and other participants
but its intention is to test facilities ahead of possible
authorization. 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.
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 the modest overnight interest rate.