On Friday, the Federal Reserve Board announced that it has approved amendments to Regulation D which will establish a new Term Deposit Facility (TDF) which, the Federal Reserve indicates, "will be one of several tools that the Federal Reserve could employ to drain reserves when policymakers judge that it is appropriate to begin moving to a less accommodative stance of monetary policy." The Federal Reserve emphasized that "the development of the TDF is a matter of prudent planning and has no implication for the near-term conduct of monetary policy."
Under the TDF, the Federal Reserve Banks will offer term deposits to institutions that are eligible to receive earnings on their balances at Reserve Banks. The Federal Reserve stated that it "anticipates that it will conduct small-value offerings of term deposits under the TDF in coming months to ensure the effective operation of the TDF and to help eligible institutions to become familiar with the term-deposit program." The Federal Reserve also promised to release "more detailed information about the structure and operation of the TDF, including information on the steps necessary for eligible institutions to participate in the program," at a later date.
The final rules incorporate public comments on the proposal announced on December 28, 2009, and will become effective 30 days after publication in the Federal Register, which is expected to occur shortly.
Separately, the Federal Reserve Bank of New York released on Friday the form of master repurchase agreement for money market funds participating in the Federal Reserve's reverse repurchase program. This is another potential tool to drain reserves from the banking system that the Federal Reserve is testing.