The U.S. Federal Reserve is taking an additional measure to lay the groundwork to drain excess bank reserves, as it seeks to remove some of the $1 trillion in cash it injected during the global credit crisis.
The New York Federal Reserve, which conducts open market operation for the U.S. central bank, said on Monday it has begun a program to expand the number of firms for conducting reverse repurchase agreements, including domestic money market mutual funds.
It said the announcement should not be read as a signal for changes or timing in overall monetary policy.
Reverse repos, which traders call them, are a tool that the U.S. central bank has said it will use to drain excess reserves, which some economists worry will become inflationary if left in the system for too long as the economy recovers.
Under reverse repos, the New York Fed sells securities to certain financial firms for later repurchase. Traditionally, it transact the operations with primary dealers on Wall Street.
However, due to the unprecedented amount of excess reserves, the New York Fed has signaled it will expand the types of firms it would do this business with.
This expansion of counterparties for the reverse repo program is a matter of prudent advance planning, the New York Fed said in a statement.
The N.Y. Fed has not conducted reverse repos this year, though it did conduct small scale reverse repo tests late last year with primary dealers.
There was little market reaction to the Fed announcement. The average overnight interest rate on federal funds, or lending of excess reserves between banks, was last bid at 0.1700 percent, compared with 0.1600 percent late on Friday.
CRITERIA FOR NEW PLAYERS
The New York Fed said its reverse repo program will be aimed at firms including domestic money market mutual funds that provide large amounts of short-term funding to financial markets.
Basically the Fed needs a bigger pool from which to draw in order to conduct these reverse repos, said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco
The New York Fed requires firms having net assets of no less than $20 billion for six consecutive months prior to applying as a reverse repo counterparty.
It said it expects to publish a master repo agreement for money market funds in about a month.
The additional counterparties for its reverse repos program will not be eligible to participate in other transactions conducted by the New York Fed.
(Additional reporting by Burton Frierson, Editing by W Simon )