This post is quite short, yet very important. For the first time, the Fed is conducting "Reverse repos."

Why is this so significant? For the past year the Fed has been doing "repos." A repo is when the Fed steps in and buys Treasury securities. The effect is to create a credit on bank balance sheets and consequently give them more lending power.

Why is the Federal Reserve doing "reverse repos?" What is a "reverse repo" and how does it work?

Looking back at the past year, the Federal Reserve has printed piles of money and pumped them into the banking system and the economy. Now there is a good deal of worry that all of this excess money sloshing around will create inflation, not to mention that our dollar will head downward on world markets, creating uncertainty among trading partners across the globe. China stepped in the currency markets yesterday and "bought" dollars to support the dollar.

The Federal Reserve, mindful of the turmoil that a weakening dollar has on world markets has tested the use of "reverse repos" to drain money from our banking system. In a reverse repo the Fed sells assets such as Treasury securities to dealers for cash with the agreement to buy them back at a slightly higher price at a later date. The effect is that bank reserves are drained from the financial system.