NEW YORK (Reuters) - The U.S. Federal Reserve’s introduction of term reverse repurchase agreements on Monday will likely help hold down the level of banks’ excess reserves, analysts said, as it tests various tools to prop up interest rates when it decides to tighten policy.
On Monday, the U.S. central bank awarded $50 billion in term reverse repos (RRP) in the first of four weekly test operations which it will pay Wall Street dealers, money market funds, mortgage finance agencies and other qualified participants an interest rate of 0.08 percent for them to borrow its Treasuries holdings for 28 days.
The Fed later allotted $104.2 billion in overnight RRP at an interest rate of 0.10 percent.
The two RRP operations occurred as $402 billion worth of seven-day deposits at the Fed’s term deposit facility (TDF) matured on Monday.
The RRP, TDF and interest the Fed pays on excess reserves are among the programs the central bank uses drain excess cash from the banking system and to push short-term rates higher.
“The decline in excess reserves has stemmed partly on the participation in Fed’s reverse repos and term deposit facility,” said Joe Abate, money market strategist at Barclays Capital in New York.
Excess reserves, or the amount of cash banks keep on hand above what is required by the Fed, have also fallen in recent weeks on the rise in deposits. The Fed has been paying interest on those reserves in order to keep short-term rates from falling into negative territory.
In the week of Nov. 26, the amount of excess bank reserves was $2.414 trillion, down from a peak of $2.717 trillion in the week of Sept. 17. During that span, U.S. bank deposits grew to $10.4 trillion from $10.3 trillion, the latest Fed data showed.
Barclays’ Abate expected excess reserves would rise after Monday after the Fed pays banks back on maturing TDF, although the increase might be brief as the Fed plans to offer another $250 billion in term RPP in the next three weeks.
Reporting by Richard Leong; Editing by Meredith Mazzilli