Bessent wants the Fed to expand its FIMA repo facility so Japan can support the yen without selling Treasuries. Chairman Warsh has signaled deference to Treasury on international matters.
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The Federal Reserve could get pulled into the Trump administration's effort to support Japan's yen, and the mechanism would be a little-used lending facility that Treasury Secretary Scott Bessent wants to expand.
Bessent wants the Fed to enlarge its Foreign and International Monetary Authorities (FIMA) Repo Facility, which lets foreign central banks borrow against their U.S. Treasury holdings for short periods instead of selling them. Selling Treasuries to raise dollars for intervention pushes yields higher. The FIMA route avoids that.
The request lands on the desk of new Fed Chairman Kevin Warsh, who has signaled he wants to rework the Treasury-Fed relationship. Warsh told the Senate during his confirmation that the Fed should defer to Treasury on international finance matters. "Fed officials are not entitled to the same special deference in areas affecting international finance," he wrote. "In those matters, the Fed will work with the Administration and with Congress."
Bessent said Sunday on X that the U.S. had joined Japan to support the yen, selling euros from the Treasury's Exchange Stabilization Fund rather than dollars. The yen had slid to nearly 164 per dollar last week, its weakest since 1986, according to Factset. It bounced 3.5% to just under 157 by Monday afternoon.
The intervention may have been aimed at the Treasury market as much as the yen. The rate differential between Japan and the U.S. has fueled a long-standing carry trade where investors borrow cheaply in yen to buy higher-yielding Treasuries or AI-driven U.S. stocks. "The yen carry trade has broken down," Torsten Slok, chief economist at Apollo Global Management, wrote Sunday. Arresting the yen's slide could keep demand for Treasuries alive. The 10-year note had risen above 4.7% before the intervention before falling slightly below that level. Bessent has said he watches the 10-year yield closely.
Japan holds roughly $1.1 trillion in U.S. Treasuries. Its recent intervention is estimated at $60 billion to $80 billion. The FIMA facility has a $60 billion daily limit. Bessent wants that "upsized," he said.
The Fed typically supports efforts to stabilize global finance in moments of acute stress. It is less clear the yen's long-term slide qualifies as a market-functioning concern. Japan has access to a Fed swap line that lets it trade yen for dollars, but it did not use it this time. "The current norm is that the central bank swaps are used to fund dollar lender of last resort type activity, not intervention," Brad Setser, a former Treasury official now at the Council on Foreign Relations, wrote on X.
Expanding FIMA requires a vote of the Federal Open Market Committee. It is not clear how much support Warsh has within the Fed for major policy changes. The Fed declined to comment.
A renewed Treasury-Fed partnership could extend beyond Japan. The United Arab Emirates has requested a swap line of its own, normally a Fed decision. Warsh's deference view suggests he might be open to extending swap lines to new countries. He and Bessent talk often, Warsh told the Senate, beyond their weekly breakfasts.
The Treasury did not respond to a request for comment about its plans.
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