Fed's Unexpected Partner to Manage Rates: Foreign Central Banks

"The idea of the domestic RRP facility is to build more of a floor under market rates and this is an opportunity to extend that in a different direction," said Lou Crandall, chief economist at Wrightson ICAP LLC in Jersey City, New Jersey.

The New York Fed raised the rate it pays on overnight borrowings through RRPs with foreign central banks to 0.09 percent on average over the first nine months of 2015 from 0.03 percent during the same period of 2014, according to the U.S. central bank’s latest quarterly financial statements. During the same period the Federal Open Market Committee held the RRP rate paid to domestic money-market funds at 0.05 percent.

Crandall, a former Fed economist, said foreign central bank reserve managers are probably utilizing Fed RRPs as a liquidity cushion, because they are easier to liquidate than U.S. government debt holdings at short notice.

"In the 1990s, it wasn’t uncommon to see the RRP pool pop during periods of foreign exchange turbulence for precisely that reason: that funds would be positioned there, ready for use," he said.