Fed sets May 17 trial of ‘term deposit facility’; part of overall testing program

A floating-rate offering of seven-day term deposits with an early withdrawal feature through its “Term Deposit Facility” (TDF) will be offered May 17 by the Federal Reserve, the agency said Thursday. The offering is part of the Fed’s previously announced periodic testing of the TDF, the agency said.

The May 17 offering of the seven-day term deposits will have a rate set equal to the sum of the interest rate paid on excess reserves plus a fixed spread of 1 basis point, the Fed said, with the maximum tender amount per institution of $250 million. The operation window will be open from 10:30 a.m. EDT to 12:30 p.m. EDT, and awarded deposits will settle the same day the operation is executed, the agency said. The Fed said it plans to conduct a similar routine TDF test operation in the second half of 2018.

The TDF is a program through which the Federal Reserve Banks offer interest-bearing term depositsto eligible institutions. According to the Fed, term deposits facilitate the implementation of monetary policy “by providing an additional tool by which the Federal Reserve can manage the aggregate quantity of reserve balances held by depository institutions.” Funds placed in term deposits are removed from the reserve accounts of participating institutions for the life of the term deposit and thereby drain reserve balances from the banking system, according to the Fed.

In Thursday’s announcement, the Fed said testing of the facility operations are aimed at ensuring the operational readiness of the TDF and “providing eligible institutions with an opportunity to maintain familiarity with term deposit procedures.” The TDF test operations are a matter of prudent planning, the Fed said, “and have no implications for the near-term conduct of monetary policy.”

Federal Reserve to offer 7-day term deposits on May 17