By Dow Jones Business News, September 30, 2013, 07:05:00 PM EDT
Banks and other financial companies lent the Federal Reserve Bank of New York$58 billion in cash Monday in exchange
for low-risk securities, in the latest test of an overnight program that the Fed hopes will improve its control over
short-term interest rates.
The banks, money funds, securities dealers and government-sponsored entities took the securities from the central bank
in a so-called reverse repurchase agreement. For some, the swap enabled participants to make their balance sheets look
less risky at the end of the third quarter Monday, while testing the mechanics of a process that will help the central
bank reduce the amount of cash outstanding in the financial system, market participants said. Others were simply
exploring the capabilities of the Fed's new tool.
A Fed reverse repurchase agreement transaction is "great window dressing for the balance sheets of the participating
money funds," said Ray Stone, economist at Stone & McCarthy Research Associates. Overnight reverse repo transactions can
be particularly attractive to companies that want to gild their balance sheets at the quarter's end because they last
for only one day, allowing for a quick move into riskier and higher-yielding assets.
Participating firms lent the Fed nearly $17 billion on Friday and $9 billion the day before that. Market participants
broadly expect the size of these reverse repo operations to decline over coming days with the start of a new quarter.
The names of participants weren't disclosed.
The New York Fed on Friday doubled the size of the transaction that a given firm can engage in, raising it to $1
billion. Both the number of bidders and average bid size increased on Monday.
The New York Fed has stressed the reverse repo tests have no implications for monetary policy, which remains
aggressively easy after the Fed decided in late September to press forward with its bond-buying stimulus effort. The New
York Fed declined to comment Monday.
The central bank announced the launch of the fixed-rate overnight reverse repo facility on Sept. 20. It is part of the
Fed's exploration of strategies to manage liquidity in the future when it shifts to a more restrictive monetary policy.
The reverse repo facility takes in cash in exchange for lending securities from the Fed's vast holdings of bonds.
In a speech Sept. 23, New York Fed President William Dudley said the main goal of the reverse repos is to increase the
Fed's control over short-term interest rates and put a floor under which short-term rates are unlikely to fall. A report
released Monday by the New York Fed said reverse repo transactions may be particularly well suited to this mission
because they are more able to address "daily liquidity shocks."
For some time, the Fed has been testing various tools it hopes will help it tighten monetary policy in the future.
That day lies well off--central bankers expect to raise rates sometime in 2015--but the Fed's unprecedented liquidity
levels mean unwinding easy-money policy will be more complex than in the past.
Given the quarter-end forces that drove demand Monday, future Fed reverse repo transactions will likely be smaller. "I
would be very surprised" if demand didn't trail off over coming days, said Ira Jersey, U.S. interest rate strategist at
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