NY Fed absorbs $11.81 bln in 1st test of reverse repo facility | Reuters

NY Fed absorbs $11.81 bln in 1st test of reverse repo facility
| Reuters


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 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, the reverse repos 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.
New York Fed President William Dudley on Monday sought to dispel misconceptions that the introduction of the tool represents a change in monetary policy, saying it is meant only to help improve the Fed's control of overnight interest rates.