November 30, 2009 / 4:03 PM / 8 years ago

NY Fed: Will conduct real value reverse repo tests

NEW YORK (Reuters) - The New York Federal Reserve said on Monday that it will conduct a series of small, real value triparty reverse repurchase agreements with primary dealers in coming weeks in another round of testing of the cash-draining tool.

The Federal Reserve — the U.S. central bank — has said that so-called “reverse repos” could be one way to reverse the massive cash injections it has made into the banking system to combat the crisis when the time comes.

The New York Fed stressed the transactions are an effort to ensure the exit strategy tool is ready if the Fed’s policy-setting Federal Open Market Committee decides it should be used.

On October 19, the New York Fed said in a statement it had been testing the mechanics of tri-party reverse repurchase agreements. The next batch of testing will differ from those earlier tests as a small amount of reserves will be changing hands.

The operations have been designed to have no material impact on the availability of reserves or on market rates, the New York Fed said.

“Like the earlier rounds of testing, this work is a matter of prudent advance planning by the Federal Reserve,” the New York Fed said in a statement.

“It does not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.”

The transactions will be conducted at current market rates and the results will be posted on the New York Fed’s website, the New York Fed said.

The Fed did not preannounce the previous round of tests. This sparked worries among market participants that the Fed was about to drain cash through reverse repos, which involves selling assets for cash with an agreement to buy them back later at a higher price. The New York Fed’s October 19 statement helped soothe those fears.

In its efforts to help the economy recover from a severe recession, the Fed cut interest rates to near zero last December, and this year further eased financial conditions by buying longer-term Treasuries and mortgage-related securities. The Fed’s balance sheet has more than doubled to $2 trillion in the process.

No decision has been made on what tools the Fed will use, and in what order, to eventually tighten monetary policy once the recovery picks up steam.

Repos and reverse repos have been in the Fed’s toolkit for years and both were used as recently as December 2008.

The testing is focused on tri-party reverse repos. In the tri-party repo market, clearing banks JPMorgan Chase & Co and Bank of New York Mellon Corp act as intermediaries, which allows for a wider range of instruments to be used in a transaction.

The Fed has been conducting tri-party repos — though not tri-party reverse repos — with primary dealers since 1999.

Reporting by Kristina Cooke, Editing by Chizu Nomiyama

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