Fed announces 5 bln usd redemption of T-bills to increase flexibility

BY

The Federal Reserve Bank of New York announced today that it would redeem 5 bln usd in
Treasury bills this Thursday in order to provide "greater flexibility" for the bank s Open Market
Trading Desk as it seeks to manage reserve levels.

The bank said more flexibility is needed in order to offset "factors that may add reserves to the banking system, such as additional discount window borrowings." The Federal Reserve Board on Friday lowered the discount window in order to ensuring continued liquidity for banks that are
facing a credit crunch.

Tony Crescenzi of Miller Tabak and Co. said the Fed s announcement could be seen as a sign
that the Fed expects 5 bln usd worth of discount window borrowings this week, and wants to
redeem the same amount in order to avoid excess liquidity throughout the banking system.

"If it turns out that the banks borrowed 5 bln usd from the Fed, it would be the most since
November 1984, excepting September 2001," Crescenzi said.

He also said today s move signals that the Fed is not ready to cut the federal funds rate, since it is trying to offset increased discount window borrowing by draining the overall banking system
of liquidity, thus preventing the actual fed funds rate from falling.

The New York Fed said it would redeem 5 bln usd by buying 7.1 bln usd of a 26-week Treasury bill that matures next February, and 5.2 bln usd of a bill that matures in November. The bank
added that it would not participate in the 4-week Treasury bill auction on September 20, 2007.

Normally, the Fed would reinvest funds in Treasuries once they reach the end of their term.

The statement said the Open Market Trading Desk would "continue to evaluate the need for
the use of other tools to add flexibility to its open market operations." It said these tools could
include more Treasury bill redemptions, reverse repurchase agreements, and Treasury bill sales.

JKL

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fj925

The statement said the Open Market Trading Desk would "continue to evaluate the need for
the use of other tools to add flexibility to its open market operations." It said these tools

BC1410

  Thanks!