The Federal Reserve Bank of New York said Monday that it will begin selling securities into financial markets "in the coming weeks" through reverse repurchase agreements to test how the central bank might absorb excess cash in the system.
The Fed has fought the financial crisis mostly by flooding banks and financial markets with cash. But as the industry shows signs of rebounding, the Fed is faced with sopping up that liquidity before it leads to inflation.
Repos could be a key tool for the Fed; by selling securities, cash would be drained from the markets. But the New York Fed said Monday that its expected transactions will be very small, with "no material impact on the availability of reserves or on market rates."
The New York Fed said the tests are "a matter of prudent advance planning" by the central bank and "does not represent any change in the stance of monetary policy."