The Federal Reserve has begun conducting small-scale tests of trades called “reverse repos” on Wall Street that would enable it to drain cash from the financial system once it decides to roll back its current extraordinarily loose monetary policy.

In a reverse repo – shorthand for a “reverse repurchase agreement” – the Fed sells assets such as Treasury securities to dealers for cash with an agreement to buy them back at a slightly higher price at a later date. In the process, bank reserves are drained from the financial system.