NY Fed to raise rate in its test of U.S. repo facility


NEW YORK, Nov 1 (Reuters) - The Federal Reserve Bank of NewYork said on Friday it would raise to 0.03 percent from 0.02percent the fixed rate offered in its "operational exercise" fora proposed facility to better control short-term borrowingcosts.

The branch of the U.S. central bank started testing theproposed tool - called an overnight, fixed-rate full-allotment,reverse repurchase agreement facility - in September. Fedpolicymakers are considering giving it the go-ahead as a newtool that could help them smooth market rates when the timecomes to tighten monetary policy.

The New York Fed has been conducting "readiness" operations,it said on Friday. On Monday, it will raise the rate by 1 basispoint; no other changes will be made.

The exercise involves dealer banks and other participantsbut its intention is to test facilities ahead of possibleauthorization. The tool is designed to mop up excess cash in thefinancial system, which if left unchecked could keep rates lowerthan perhaps desired by the Fed at a later date.

In reverse repurchase agreements, or reverse repos, the Fedtemporarily drains cash from the financial system by borrowingfunds overnight from banks, large money market mutual funds andothers, and offering them Treasury securities as collateral.Banks and the funds receive the modest overnight interest rate.

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