Fed's Repo Facility for Foreign Central Banks Never Used During Japan Intervention

The Federal Reserve's (Fed) repo facility for foreign monetary authorities has been a topic of discussion, but recent data reveals it was never used as intended. The facility allows an approved foreign central bank to raise dollars by temporarily handing Treasuries to the Fed rather than selling them in the market. However, according to the Fed's balance sheet release, foreign official repo line is at zero, unchanged on the week and year, and reportedly unused for eight consecutive weeks.

The actual flow of money is the opposite of what was expected. Foreign central banks are not drawing dollars from the Fed; instead, they are net lenders to it, with a total of $357.392 billion parked in overnight deposits. Central bank liquidity swaps, another channel through which the Fed lends dollars abroad, total only $132 million.

The facility's purpose was to prevent foreign central banks from liquidating Treasuries during a solo intervention, which would have pushed American long yields higher. However, custody data shows that foreign official holders reduced their Treasury holdings at the Fed by roughly a quarter of a trillion dollars in twelve months, despite the facility being unused.

The growth in the Fed's balance sheet is largely due to an increase in Treasury bill holdings, which rose from $195.493 billion to $533.509 billion over the year. This has led to a situation where foreign official holders sold Treasuries while the Fed bought them, resulting in a mismatch between the long end and short end of the curve.

The reserves held by depository institutions have actually decreased by $375.991 billion over the year, despite the balance sheet expanding by $116 billion. This is due to the Treasury General Account, which has increased by $443.936 billion and now holds close to half a trillion dollars in reserves.