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Fed awards fewer reverse repos at lower interest rate

Published 03/11/2014, 19:16
Updated 03/11/2014, 19:20
© Reuters The United States Federal Reserve Board building is shown in Washington

NEW YORK (Reuters) - The Federal Reserve awarded fewer overnight fixed-rate reverse repurchase agreements on Monday as the U.S. central bank began testing this programme at various interest rates into year-end.

The programme, commonly referred as RRP, is seen as a critical tool for draining cash from the banking system in an attempt to achieve the Fed's rate target when it eventually decides to tighten monetary policy.

Banks, Wall Street firms, money market funds and mortgage finance agencies lend to the Fed in exchange for Fed Treasuries holdings to earn an interest payment.

Last week, the Fed said it will test RRP at an interest rate of 0.03 percent from Nov. 13 to Nov. 14; 0.07 percent from Nov. 17 to Nov. 28; 0.10 percent from Dec. 1 to Dec. 12 and 0.05 percent Dec. 15 and after.

It said it will start testing longer-dated RRP next month with more details about them by early December.

On Monday, the Fed awarded $122.57 billion (76.70 billion pounds) of 0.03 percent RRP to 41 bidders, according to the New York Federal Reserve website.

This compared with the $186.28 billion awarded to 72 bidders on Friday at an interest rate of 0.05 percent. This was the most the Fed had awarded in more than four weeks.

The amount awarded typically jumps at the end of each month and quarter on strong investor demand for ultrashort-dated, risk-free assets.

On Oct. 1, the Fed awarded 53 bidders $212.48 billion in RRP at an interest rate of 0.05 percent.

This compared with $300 billion to 81 bidders at zero interest on Sept. 30 when 102 bidders submitted $407.17 billion in bids.

© Reuters. The United States Federal Reserve Board building is shown in Washington

The U.S. central bank has a $300 billion cap on overnight RRP.

(Reporting by Richard Leong; Editing by Meredith Mazzilli and James Dalgleish)

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