Liability Non-Reserve Liabilities

Discourage Use of the Foreign
Reverse Repo Pool

Policy Option 15 of 15 · SFB 2026-01 §5.2 · Category B

The Foreign Reverse Repo Pool

The Foreign Reverse Repo Pool (also called the foreign repo pool or FRP) is a facility operated by the New York Fed that allows foreign central banks and official institutions with accounts at the FRBNY to invest their dollar reserves overnight with the Fed, secured by U.S. Treasury securities. Balances in the FRP appear on the Fed's balance sheet as a reverse repo liability — they represent dollar cash that foreign institutions have lent to the Fed overnight in exchange for Treasury collateral.

The FRP is one of the most convenient short-term dollar investment vehicles available to foreign official institutions: it offers overnight liquidity, zero credit risk (counterparty is the Fed), Treasury-collateralised security, and a competitive interest rate tied to the IORB or ON RRP rate. As of late 2024, outstanding FRP balances stood at roughly $300–400 billion, representing a material component of the Fed's total balance sheet.

Why the FRP Inflates the Balance Sheet

From a balance sheet perspective, FRP balances are pure liabilities — they represent borrowing by the Fed from foreign official institutions, backed by SOMA assets. Unlike reserve balances (which serve a monetary policy and settlement function) or the TGA (which serves a fiscal function), FRP balances do not provide a direct monetary policy service. They exist primarily because the FRP offers foreign official institutions a slightly more attractive risk-adjusted return than the closest private-market alternative: short-dated Treasury bills.

If foreign central banks and SWFs invested their dollar reserves in T-bills rather than the FRP, the Fed's balance sheet would shrink by the amount of FRP balances redirected. The overall dollar-denominated safe asset holdings of foreign institutions would be unchanged; only the form (Fed liability vs. Treasury liability) would shift.

The Policy Option

Several mechanisms could discourage FRP usage in favor of T-bills. The most direct: reduce the interest rate paid on FRP balances below the T-bill rate, eliminating the return advantage that attracts foreign official investors to the Fed rather than the private market. For example, if 4-week T-bills yield 4.50% and the FRP pays 4.30%, foreign institutions would naturally shift their holdings to T-bills, shrinking the FRP organically.

Alternatively, the Fed could cap FRP balances per counterparty or in aggregate, forcing a gradual rundown as existing balances mature. A third approach: simply announce a sunset date for the FRP, giving foreign institutions time to transition their dollar cash management to T-bills and other private market instruments.

Relationship to International Reserve Management

Foreign central banks and SWFs use the FRP as part of their dollar reserve management. Redirecting these flows to T-bills would increase T-bill demand slightly, potentially lowering T-bill yields marginally — a beneficial side effect from the Treasury's perspective. However, foreign institutions value the FRP's zero credit risk and overnight liquidity, features that T-bills (which have term structure and secondary market risk) do not fully replicate. A significant rate differential would be required to induce migration.

Shrinking the FRP does not reduce dollar reserves globally — it simply shifts them from the Fed's balance sheet to the Treasury's. For the Fed, it is a pure liability reduction with no monetary policy impact. For foreign institutions, it is a minor portfolio reallocation.
Estimated Balance Sheet Reduction
$0B— $50B— $100B Category B · non-reserve liability reduction

Lower bound is zero because rate reductions may not fully shift FRP balances if foreign institutions value the convenience features over marginal rate differences. Migration speed and completeness are highly uncertain.

Diplomatic Considerations

The FRP plays a role in U.S. financial diplomacy — foreign central banks that hold dollar reserves at the Fed have a stake in the security and convenience of those holdings, reinforcing dollar reserve currency status. Actively discouraging FRP usage by reducing returns could be perceived as a signal that the Fed is less welcoming of foreign official dollar reserves, with potential implications for the dollar's international reserve role. The paper acknowledges these considerations but notes the effect of FRP rate adjustments on dollar reserve status would likely be negligible given the many other factors supporting the dollar.

Summary: All 15 Options

This completes the guide's 15 policy options. Options 01–13 reduce equilibrium reserve demand within the banking system; Options 14–15 reduce non-reserve liabilities on the Fed's balance sheet. Together, the paper's central estimate suggests the full implementation of all options could reduce the Fed's balance sheet by $1.2–2.1 trillion, returning it to approximately 16% of GDP from the current 21%.

No single option achieves this independently. The paper emphasises that the options are most effective as a coordinated package — particularly Options 01–07, which address the interlocking regulatory and pricing constraints that underpin excess reserve demand. Return to the overview page to review the full catalogue.