Wednesday, May 12, 2010

Politi on Fed's test of "term deposit facility"

Once the tool is ramped up to a larger scale, its purpose is to provide an incentive for banks to hold money at the central bank instead of lending it. That would help shrink the Fed's balance sheet from its current size above $2,300bn to below $1,000bn, or close to its pre-financial crisis level. The Fed has already tested so-called "reverse repurchase agreements" as another tool it intends to use to drain liquidity from the financial system - most probably shortly before it raises interest rates.

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