US Fed schedules tests on deposit facility

The US Federal Reserve said Friday it has scheduled tests of one of its tools likely to be used to drain massive amounts of money injected into the system during the financial crisis.

The central bank said in a statement that three small-value auctions of term deposits would be made over the next two months through its Term Deposit Facility (TDF).

The facility could give banks an extra incentive to keep their money at the Fed through interest-bearing deposits instead of lending it out to companies.

The Fed pumped about 1.5 trillion dollars into the financial system beginning in 2008 and cut interest rates to virtually zero percent in a bid to jolt the economy from the worst recession in decades.

As the economic grows, the central bank needs to suck out any excess money to keep inflation at bay.

The Fed described the auctions as "a matter of prudent planning and have no implications for the near-term conduct of monetary policy."

The first auction will be for one billion dollars of 14-day term deposits on June 14, followed by an auction of 28-day deposits on June 28 and another of 84-day deposits on July 12. The sizes of the second and third auctions were not specified.

Two further tests were planned for the coming months.

The maximum interest rate for the deposits will be 0.75 percent, slightly higher than the zero to 0.25 percent target range charged on overnight loans between banks.

Fed chief Ben Bernanke has often emphasized that the central bank has an "exit" strategy for the recovery but is not yet ready to shift course.

Analysts say the central bank faces a delicate task as it tries to keep stimulating growth with record-low rates and a massive injection into the financial system but also guard against a surge in inflation as the recovery gathers steam.

The government said Thursday that the economy grew by 3.0 percent in the first quarter of 2010, slowing from 5.6 percent growth in the previous quarter.