Dec 29 (Reuters) - A key Federal Reserve overnight liquidity facility saw increased use on Monday, data from the New York Fed showed.

The U.S. central bank lent a total of $25.95 billion on ‌Monday to eligible financial firms via its standing repo operations, the third-highest ​usage of the lending tool since the central bank ‍opened it in 2021 to provide fast ⁠loans collateralized ⁠with Treasury or mortgage bonds.

The funds are lent overnight at 3.75%, the ‌top of the current 3.50%-3.75% ​target range for the Fed's policy rate. 

Money markets often experience elevated volatility around the ends ⁠of quarters. Standing repo ‍facility use ​was last higher, at $26 billion, on December 1, and had hit an all-time record October 31 of $50.35 ‍billion.

The Fed's standing repo tool was designed as a shock absorber for liquidity when private lending rates were above what the Fed offered, and is seen as key to supporting monetary policy implementation and smooth ​market ‍functioning.

The Fed stopped drawing down its balance sheet earlier this month, and began buying short-dated government ​bonds to help manage market liquidity levels and ensure control over its interest rate target system.

Earlier this month the Fed removed a $500 billion daily limit on the tool to encourage freer use by banks "when economically sensible," Fed Chair Jerome Powell ​said.

Financial firms also parked $10.55 billion in cash on Fed books Monday via its reverse repo facility, the New York Fed said, down ‍from Friday's $20.34 billion.