Fed awards north of $1.6 billion in term deposits for latest test of reserve tool facility

More than $1.6 billion was awarded to 18 financial institutions in term deposits by the Federal Reserve in its latest offering and periodic test, which concluded Thursday, the central bank said.

The awarded deposits settled on Thursday and will mature one week later (Aug. 29), the Fed said in a release.

The operation (conducted through the Fed’s Term Deposit Facility, TDF) offered seven-day term deposits with the rate set equal to the sum of the interest rate paid on excess reserves plus a fixed spread of 1 basis point. The total amount of deposits awarded was $1.668 billion, according to the Fed. The 18 financial institutions participating in the offering were limited to tendering no more than $250 million. The Fed did not name the institutions awarded the deposits.

The operation was part of the Fed’s previously announced periodic testing of the TDF. The Fed said the testing is aimed at “ensuring the operational readiness of the TDF and providing eligible institutions with an opportunity to maintain familiarity with term deposit procedures.”

According to the Fed, the TDF was established to facilitate the conduct of monetary policy by providing a tool to help manage the aggregate quantity of reserve balances held by banks and other depository institutions. An increase in term deposits outstanding drains reserve balances because funds to pay for them are removed from the accounts of participating institutions for the life of the term deposit, according to the Fed.

However, the Fed has stressed in the past that the TDF test operations are “a matter of prudent planning and have no implications for the near-term conduct of monetary policy.”

Federal Reserve announces results of offering of seven-day term deposits on August 22