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

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

The branch of the U.S. central bank started testing the proposed tool - called an overnight, fixed-rate full-allotment, reverse repurchase agreement facility - in September. Fed policymakers are considering giving it the go-ahead as a new tool that could help them smooth market rates when the time comes 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 basis point; no other changes will be made.

The exercise involves dealer banks and other participants but its intention is to test facilities ahead of possible authorization. The tool is designed to mop up excess cash in the financial system, which if left unchecked could keep rates lower than perhaps desired by the Fed at a later date.

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