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Fed mulling new reverse repos to reduce liquidity: FOMC minutes

An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst
An eagle tops the U.S. Federal Reserve building's facade in Washington, July 31, 2013. REUTERS/Jonathan Ernst

(Reuters) - The U.S. Federal Reserve is considering a new tool to help it drain cash from the banking system and keep short-term interest rates at their targeted level when it decides to shift away from its current ultra-loose monetary policy, minutes of the Fed's latest policy meeting showed on Wednesday.

Fed policymakers during their July 30-31 meeting were briefed on the potential for creating a fixed-rate facility for overnight reverse repurchase agreements or reverse repos.

This reverse repo program, if adopted, will complement payment of interest on excess reserves and other tools to help achieve the Fed's interest rate targets, according the Fed's minutes released on Wednesday.

"In general, meeting participants indicated that they thought such a facility could prove helpful," the minutes said.

While they expressed interest in such as program, there was no timing indicated when policy-makers might decide on such a reverse repo facility.

In an overnight reverse repo transaction, the Fed would sell a Treasury bond to a U.S. primary dealer or a large money market fund and then would buy it back the next day. The transaction temporarily takes cash out of the banking system, while the dealer or fund earns interest on the reverse repo.

(Reporting by Richard Leong; Editing by Dan Burns and Chizu Nomiyama)

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