economy
Analysis: Federal Reserve may be pulled into Bessent’s effort to support Japan’s yen
Treasury Secretary Scott Bessent wants to defend the yen without selling Treasurys into a sensitive U.S. bond market. The Federal Reserve could help.
TL;DR
- Treasury Secretary Scott Bessent wants the Federal Reserve to expand a lending facility to support the Japanese yen without negatively impacting the U.S. Treasury market.
- Fed Chairman Kevin Warsh is reportedly seeking to redefine the relationship between the Treasury and the Fed, potentially increasing the Fed's role in U.S. financial diplomacy.
- The U.S. joined a rare foreign exchange intervention to support the yen, which has slid sharply against the dollar due to factors like U.S. interest rates, Japanese government debt, and population trends.
- The intervention may also be aimed at the Treasury market, as the yen "carry trade" (borrowing in yen to invest in higher-yielding Treasurys) is being disrupted.
- Bessent proposes using the Fed's FIMA Repo Facility, which allows foreign central banks to lend Treasurys, to support Japan and potentially ease fiscal pressures in the U.S.
- Expanding the FIMA facility would require a Federal Open Market Committee vote, and Warsh's past statements suggest a willingness to defer to Treasury on international finance matters.