# Block 024 — FX central bank reaction functions

**Status:** ● partial (pre-reads all locked; Target 1 complete; Targets 2-4 pending)
**Phase:** Phase 1 (FX)

## Topic scope

How central banks respond to FX moves. Reaction function framework. Fed, ECB, BOJ, SNB, BOC reaction asymmetries. Verbal vs actual intervention.

## Plan

**Prerequisite:** Block 00a (rubric), Block 00b (anti-patterns). Block 023 (CIP/UIP) — covered cross-currency basis substrate that Block 024 builds on. Block 014 (cross-currency basis, diagnostic) — covered the three-signal-layer diagnostic that Block 024 will apply to CB facility activation.

**Status:** ✓ done (Session 36, 2026-08-02 — all four targets covered at Working+). Pre-reads (Sessions 33-34): McCauley + Schenk 2020 + Borio 2016 + CB swap line communications. Target 1 (Session 34, 2026-07-27): swap-line mechanics + history + 4 systemic criteria + post-2013 PM edge. Target 2 (Session 36, 2026-08-02): Borio cycle-position framework + velocity-vs-direction refinement + sub-cycle vs global cycle + commitment size moderates holding window. Target 3 (Session 36, 2026-08-02): Tier 1 vs Tier 2 architecture + coordination = stress × political judgment. Target 4 (Session 36, 2026-08-02): diagnostic tie-back to Block 023 + Fed tool choice as diagnostic + draw-size discriminator + basis-as-diagnostic cap. 33 atomic Anki cards in FX deck total.

**Pre-reads (assigned 2026-07-26, Session 32 close):**

- **Source 1 (DONE 2026-07-27, Session 33 side-session):** McCauley + Schenk (2020) "Central bank swap lines and cross-border bank flows" — ~20 min, taught not read. Substrate locked at Working+. 8 atomic Anki cards pushed.
- **Source 2 (DONE 2026-07-27, Session 33b side-session continuation):** Borio et al. (2016) "FX intervention and the global cycle" — abstract + intro, ~15 min, taught not read. Substrate locked at Working+. 5 atomic Anki cards pushed.
- **Source 3 (DONE 2026-07-27, Session 33b side-session continuation):** ECB / Fed / BOJ official communications on dollar swap lines (2013, 2020 activations) — ~10 min, taught not read. Substrate locked at Working+. 3 atomic Anki cards pushed.
- **Skip:** Detailed mechanical FX option pricing (Block 029 territory), EM-specific FX intervention (Block 028 territory).
- **Total: ~45 min. ALL PRE-READS LOCKED at Working+.**

### Target 1 (Session 34) — CB swap line mechanics + history

**Mechanics:** Two-step structure (Source 1). Activation: Fed ratifies when foreign CB asks. Always yes. Regime determines whether Fed *preempts* or just *ratifies*. Terms: standing rate OIS + 25bp (since March 2020). Tenor 1-week. Collateral: foreign CB posts own currency. Recourse: foreign CB absorbs loss (Fed made whole). Size: uncapped in principle.

**Four criteria for "systemic":** (1) Multiple foreign CBs drawing simultaneously (cross-section break). (2) Draw sustained over multiple weeks. (3) Draw size large relative to CB's normal dollar operations. (4) Accompanied by Frame 2/3 public statements. 3-4 met = systemic. 1-2 = currency-specific.

**Diagnostic tie-back to Block 014/023:** SOFR wide + cross-currency flat = US-domestic bank funding → standing repo (NOT swap lines). Cross-currency wide + SOFR flat = global dollar funding → swap lines + possibly rate cut + possibly expansion. Both wide = systemic (March 2020) → everything. CB swap-line diagnostic is specifically the cross-currency basis layer.

**2013 vs 2007-08:** episodic (2007-08, emergency construction) → standing (2013, pre-positioning) → expanded (2020, EM access). Pattern: Fed increasingly treats global dollar funding as systemic issue requiring permanent infrastructure.

**Post-2013 PM edge:** Pre-2013, activation = crisis signal. Post-2013, parameter change = escalation signal. PM reads *delta* (parameter change), not *event* (activation). The Fed can change rate/scope/terms without creating new architecture.

**Target 1 close — 8 atomic Anki cards pushed (note IDs 1785325709745-1785325709943):**
1. Swap-line activation — Regime 1 vs Regime 2 Fed response distinction
2. Systemic criteria — 4 criteria for Fed's diagnostic
3. Three-signal-layer diagnostic tie-back (Block 014 + 023 + 024)
4. Post-2013 PM edge (read delta, not event)
5. Frame vs regime independence (independent substrate layers)
6. Three-layer signal stack synthesis (cross-source)
7. CB inaction 5-explanation framework
8. National debt / FX basis mechanism (high-debt sovereigns)

### Target 2 (NOT YET COVERED) — CB intervention vs no-intervention

Apply Borio substrate. When does the Borio-aligned defined-horizon fade upgrade to a capitulation bet? When does it stay as the default? Tied to the 5-explanation inaction framework (Probe 3).

### Target 3 (NOT YET COVERED) — Fed-ECB-BoJ coordination / non-coordination

Global dollar funding as a global public good. Why is the standing network standing (5 CBs since 2013) vs episodic (1998, 2007-08, 2020)?

### Target 4 (NOT YET COVERED) — Diagnostic tie-back to Block 023

Basis signature + CB response = policy-channel diagnostic. Three-signal-layer diagnostic applied to which CB facility activation = which layer broke.
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## Carry-forward to next block

Block 024 is the natural follow-on to Block 023 (CIP/UIP) — both deal with FX plumbing and CB response. The McCauley + Schenk substrate (Source 1) directly answers the question "what does the cross-currency basis diagnostic tell us about how the Fed/ECB/BOJ coordinate (or don't) when dollar funding stress hits?" Block 024 will build on this with: (a) the global financial cycle framing from Borio, (b) the historical record of CB swap-line communications, (c) the diagnostic tie-back from Block 023 (basis signature + CB response = policy-channel diagnostic).

**Pre-read status:** Source 1 locked. Sources 2-3 still to teach. Block 024 main study session can proceed once Sources 2-3 are taught (will be a faster-than-usual main session because Source 1 substrate is already at Working+).

**Resume file:** `_session-state/2026-07-27-resume.md`.