WASHINGTON, August 5 (Reuters Breakingviews) - The Federal Reserve’s tool shed is strewn with lending facilities gathering dust from past financial crises. Treasury Secretary Scott Bessent has picked one up in recent days, intervening in Japanese currency markets. The goal was to stabilize the yen, lowering the odds that the Asian nation might have to engage in maneuvers that entail selling its $1.1 trillion of U.S. government debt. The action shows that the Trump administration's appetite for claiming the central bank's powers has not dissipated. New Fed Chair Kevin Warsh’s stumbling start provided an opening for this interference.
Warsh, Bessent and the question of Fed independence
Bessent’s timing could hardly be better. The Fed’s independence was recently upheld by the Supreme Court's rejection of Bessent and President Trump’s first takeover effort, which focused on firing sitting governors. But the high court ruling made clear that this independence applies primarily to the conduct of monetary policy, and that there other areas, such as financial regulation, that would be legitimate areas for the executive branch to exert itself. Foreign policy is probably another one of those areas.
Warsh said throughout his confirmation process that he wants to overhaul the Fed-Treasury relationship. His early days have been rocky: yields on 10-year government debt rose to a three-year high in the wake of a disastrous press conference last week, when he refused to give an indication of the path of future monetary policy. Bessent is now pushing further, asking the Fed to enlarge the facility used in Japan's case, which allows foreign owners of U.S. Treasuries to temporarily swap these holdings for dollars, beyond its current $60 billion cap. If Warsh gives too much leeway to Bessent over Fed operations, other members of the Federal Open Market Committee may find the need to step in and try to limit Treasury's access to lending tools. The definition of an “independent” central bank remains far from settled.
The temporary repurchase facility and Treasury's role
The administration’s intervention to stabilize the yen makes use of a 2020 temporary repurchase facility at the Fed for foreign governments. The world’s most powerful central bank creates such lending facilities during major liquidity crunches, like the early days of the Covid-19 pandemic. Though run by the Fed, it was set up in concert with the Treasury Department: a typical arrangement in emergency situations that recognizes the primacy of Treasury in carrying out international economic policy. After a crisis has dissipated, however, authorized programs are rarely fully sunset and instead remain ready for use by policymakers at any time.
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