Demystifying Fed Balance Sheet Facilities & FX Intervention

Research evidence excerpt

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August 8, 2026 12:08 AM GMT

US Rates Strategy | North America

Morgan Stanley & Co. LLC

Martin W Tobias, CFA

Strategist

Demystifying Fed Balance Sheet

Facilities & FX Intervention

Matthew Hornbach

Strategist

Shaun Zhou

Strategist

Japan's MoF has increased the flexibility and scale of its FX

intervention toolkit, while reducing need for sales of Treasuries,

but relative economics argue against material FIMA repo use.

Soft July payrolls and tight financial conditions reduce higher

terminal rate risks; maintain M7M8 steepeners.

Aryaman Singh

Strategist

Eli P Carter

Strategist

Key Takeaways

Japan MoF’s potential use of the Fed's FIMA repo facility strengthens efficacy of

its signaling; it raises perceived size and flexibility of FX intervention.

But the economics of using FIMA repo for temporary USD funding instead of cash

at the Foreign RRP pool make significant FIMA repo use for intervention unlikely.

Concerns about Fed balance sheet size do not rule out bigger FIMA repo

counterparty limits – larger caps may work to a smaller balance sheet over time.

Fed Chair Warsh’s reaction to tightening financial conditions, plus soft July

payrolls, have led investors to abandon aspirations of a higher terminal rate.

We think investors should remain in SFRM7M8 curve steepeners into July CPI,

which should allow inflation and hike premia to continue to slowly dissipate.

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