WASHINGTON – The Federal Reserve on Monday will conduct the first test of a new tool intended to soak up the huge amounts of money it has injected into the economy.
WASHINGTON – The Federal Reserve on Monday will conduct the first test of a new tool intended to soak up the huge amounts of money it has injected into the economy. Under the program, the Fed will offer banks the opportunity to purchase the equivalent of certificates of deposit.
The so-called "term deposits" will pay interest and provide banks with an incentive to keep their money at the Fed. Otherwise, circulating it through lending could cause higher inflation. In an effort to combat the financial crisis and stimulate the economy, the Fed cut a key short-term interest rate to a record-low rate of nearly zero. It also pumped about $1.5 trillion of extra funds into the financial system.
Once the economy is on firmer footing, the term deposits program will be one of the Fed’s tools for reeling in that extraordinary stimulus.
The central bank said Friday that it will auction $1 billion of the so-called "term deposit" securities on Monday. The securities will mature in 14 days.
The central bank said last month that a second operation will be conducted on June 28 for 28-day deposits and a third will be held on July 12, offering 84-day deposits. Amounts weren’t provided for those operations.
The operations are intended as a test of the term deposit program.
Copyright 2010 Associated Press.