NEW YORK, June 24 (Reuters) - The New York Federal Reserve said on Monday it will conduct small-scale repurchase agreements on Tuesday with the 21 U.S. primary dealers in a bid to test all the participants’ readiness.
Primary dealers are Wall Street firms that qualify to do business directly with the U.S. central bank.
This will be the third time the New York Fed’s trading desk, which handles the Fed’s open market operations, holds these tests of repos and reverse repos - which change the levels of bank reserves and affect the level of short-term interest rates.
“Like the earlier repo and reverse repo operational readiness exercises, this work is a matter of prudent advance planning by the Federal Reserve. The operations have been designed to have no material impact on the availability of reserves or on market rates,” the New York Fed said in a statement on Monday.
In a repo, the New York Fed buys a Treasury bond or a mortgage-backed security under an agreed date to sell it back to a dealer for either overnight or longer. The temporary purchase would add cash to the banking system, putting downward pressure on the federal funds rate and other short-term rates.
In a reverse repo, the New York Fed sells a Treasury bond or an MBS under an agreement to buy it back in the future. The temporary sale of the security removes excess reserves from the banking system, putting upward pressure on short-term rates.
The Fed has used these temporary open market operations to manage its target on the federal funds rate, which is the overnight cost banks charge to borrow one another’s excess reserves. The fed funds rate is a benchmark for what U.S. banks charge on loans to businesses and consumers.