Fed tests reverse-repo transaction

The Federal Reserve Bank of New York Thursday made its first live test of reverse repurchase agreements as a way to drain money from the financial markets, the Financial Times reported.

The Fed plans to use reverse repos to restrain inflation once central bankers believe the economy has sufficiently recovered from the financial crisis to handle the tightning.

When the New York Fed conducts a reverse repo, it sells assets such as Treasury securities to broker-dealers for cash, with an agreement to buy them back later at a higher price. The Fed does the deals through the tri-party repurchase market with its Primary Dealers, who are obligated to conduct trades for the Fed’s open market committee, which sets monetary policy.

During the Thursday test, the Fed sold $180 million in securities and agreed to buy them back in three days for $180 million plus 0.16 percent interest, the Financial Times reported. In a market that trades trillions of dollars each day, the transaction was minimal, intended solely as a test, regulators said.