The Federal Reserve Bank of New York's research chief detailed the case for an additional policy tool to raise interest rates that would reduce dealings with the shadow-banking system when the time comes to do so.

The tool, called a segregated balance account, could be used to supplement the U.S. central bank's other mechanisms for raising rates, according to a paper released Friday and co-written by New York Fed Director of Research James McAndrews.

The proposal would reduce the Fed's need to transact directly with shadow lenders such as money-market mutual funds to soak up cash from the system and nudge rates higher. The paper expounds upon an idea discussed at the policy-setting Federal Open Market Committee's (FOMC's) October meeting as an option staff was exploring, minutes of the session show.

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