Repo Tests for Withdrawal Readiness Program

In recent news, the Federal Reserve has announced that they will be conducting a reverse repurchase agreement in order to test one of the tools for a future withdrawal of the central bank’s monetary stimulus.

Currently the series of tests do not represent a change to the monetary policy but are in fact part of the Fed’s preparation to determine readiness of their program, which will include agency mortgage backed securities for the first time.

During a reverse repurchasing agreement, the Fed will lend securities for a pre-set length of time. After the funds reach maturity they will be returned to the fed.

This possible reverse repo is just one of a number of tools that the Fed is considering using in order to withdraw some of the money that was put into the financial system to combat the recession.