Federal Reserve to Test Offering Term Deposits

Federal Reserve to Test Offering Term Deposits

The Federal Reserve Board announced this month that it will soon offer small-value term deposits to eligible depository institutions through the Term Deposit Facility (TDF) program approved earlier this year. customers and bank teller

Reserves can be reduced quickly
Term deposits are just one of the tools the Federal Reserve has at its disposal to reduce the large volume of reserves currently in the banking system. Other available tools include reverse repurchase agreements and the authority to pay interest on reserves held at the Federal Reserve Banks. These tools will "allow the Federal Reserve to drain hundreds of billions of dollars of reserves from the banking system quite quickly, should it choose to do so," said Federal Reserve Chairman Ben Bernanke in March testimony before Congress.

No policy implications with TDF
The first of up to five small-value offerings could be held as early as mid-June. The offerings have no implications for monetary policy in the near term, the Federal Reserve Board said. Instead, they are a matter of planning since they allow the Fed to test the effectiveness of the program's operations and give institutions an opportunity to become familiar with the process.

Similar to many other money market instruments, the small-value TDF offerings will be "simple fixed-rate instruments with maturities of 84 days or less and will be issued primarily through competitive single-price auctions," the Board said in a press release. There will also be a noncompetitive bidding option to ensure access for smaller institutions.


May 19, 2010