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The hallmark of a modern central bank is its ability to conduct monetary policy independent of direct political influence. Without independence, a central bank's promise to deliver long-term price stability [...]

Since the mid-1990s, monetary authorities in most large developed countries have backed away from foreign-exchange intervention-buying and selling foreign currencies to influence exchange rates. Switzerland's recent experience goes a long way to illustrate why: Foreign-exchange intervention did not afford the Swiss National Bank with a means of systematically affecting the franc independent of Swiss monetary policy, and it left the Bank exposed to foreign-exchange losses. To affect exchange rates, central banks must change their monetary policies., Before the recent international financial crisis, Switzerland's monetary authority, the Swiss National Bank, had not intervened in the foreign-exchange market since the mid-1990s. The Bank's hiatus from such operations ended [...]

Recently, the U.S. Treasury announced a new, temporary insurance program for U.S. money-market mutual funds. To guarantee payment of these funds' liabilities, the Treasury will use the assets of its Exchange Stabilization Fund. Created in the 1930s to stabilize the exchange value of the dollar, it has been tapped on occasion to supply loans to foreign countries in financial distress. This latest use of ESF assets is unlike anything the Fund has been used for before., The U.S. Treasury acted recently to preempt problems in another area of the financial system weakened by the current crisis--U.S. money-market mutual funds. Money-market mutual funds invest in highly rated [...]

This Economic Commentary explains how warehousing--a seemingly innocuous institutional arrangement between the Federal Reserve and the US Treasury--came to threaten the Fed's independence. Warehousing began as an arcane procedure designed to help the Treasury cover a specific type of foreign-exchange exposure. It then grew into a supplemental source of funding for the Treasury's foreign-exchange interventions. Eventually the procedure morphed into a sizeable off-budget source of funding for other Treasury activities and seemed an inappropriate subversion of the congressional appropriations process, a development that raised concerns within the Fed about its ability to conduct monetary policy free from political concerns., Federal Reserve warehousing--where the Fed and the US Treasury swap foreign-currency holdings--was one of the most controversial aspects of US foreign-exchange operations in the late twentieth century and a key [...]

The federal funds rate--the interest rate that the Federal Reserve uses to guide monetary policy--currently stands at 1 percent, its lowest level since the recession of 1958. Overnight reserve-market interest [...]

The overarching goal of monetary policy is to keep money's purchasing power stable. Sometimes, however, business cycle developments or other events intervene, causing policymakers to focus for a while on [...]

In January, President Menem of Argentina proposed strengthening his country's commitment to monetary stability by replacing the peso with the U.S. dollar. Dollarization leaves Argentina without a lender of last resort, but the Federal Reserve's current operating procedure, together with existing Argentine arrangements, mitigates this drawback., By almost any objective measure, Argentina surely stands as one of the outstanding economic success stories of the past decade. Throughout the 1980s, inflation plagued the Argentine economy. By the [...]

The recent global financial crisis left governments in many advanced countries with very heavy debt burdens and their central banks with huge portfolios of government bonds. With many central banks today still facing policy rates that are uncomfortably close to zero, some may follow the example of Japan, which recently added a new long-term interest-rate target to its short-term target to give itself 'yield-curve control.' The Federal Reserve's foray into similar territory around the Second World War suggests that combining yield-curve control with quantitative easing when government borrowing needs are substantial can create constraints on monetary policy that are not easily removed., On September 21, the Bank of Japan modified its quantitative easing program, combining a new long-term interest rate target with its existing short-term interest rate target to give the bank [...]

The U.S. current-account deficit for 1998 will break all records, adding still more to our international indebtedness. Our persistent shortfalls imply neither profligacy nor an unstable economic situation. On the [...]

To understand the behavior of exchange rates, it is often useful to view them as consisting of two parts - a real exchange rate and a component reflecting domestic and foreign inflation differentials. Most important, however, is an appreciation of the crucial role that expectations play., Each day, more than $1.2 billion worth of foreign exchange changes hands around the globe, an amount that far exceeds the daily value of word trade. Approximately 83 percent of [...]

This article investigates the forecast value of U.S. interventions in the foreign exchange market, which have become increasingly rare in the last seven years. Evidence of superior forecasting skill would imply that U.S. monetary authorities typically act with better information than the market and that intervention could alter foreign exchange traders' expectations about rates. However, the analysis presented here shows that this was not the case for recent interventions (May 1, 1990-March 19, 1997), and that official transactions by U.S. monetary authorities do not seem to improve the efficiency with which the foreign exchange market obtains information., Introduction In the past seven years, U.S. interventions in the foreign exchange market have become increasingly rare.(1) This paper offers an explanation for the reluctance to intervene. The apparent frequency [...]

Economists believe that monetary policy can affect real economic growth, at least in the short term provided the public does not expect policy changes such that the accompanying price adjustments are misinterpreted. Such attempts to exploit the connection between monetary expansions and real economic growth, if done frequently, will be noticed by the public in the long run, thus distorting the allocation of resources from productive uses to protective enterprises. Economic growth can thus be achieved if the central bank eliminates price uncertainties associated with inflation., The media frequently take central banks to task for failing to encourage real economic growth. Usually, such criticisms center on the business cycle, with analysts calling for monetary ease when [...]

From time to time, the United States enters the foreign exchange market in an attempt to influence the behavior of exchange rates. The objective may be to nudge an exchange [...]

To restore faith in the peso's purchasing power, Mexico might consider a currency board. In contrast to a central bank, a currency board would eliminate monetary policy discretion and offer full convertibility of pesos into dollars. The arrangement would, however, prevent exchange-rate changes from aiding economic adjustments., A lack of confidence in the peso's purchasing power was fundamental to Mexico's recent currency crisis and remains central to the nation's convalescence. In establishing a credible commitment to price [...]

Despite commonly expressed complaints about the persistent U.S.-Japanese trade imbalance, restricting Japan's access to our markets will not erase the trade deficit or surplus of either nation. Instead, trade imbalances are sustainable, beneficial, and proper reflections of domestic saving and investment decisions.

Recent economic studies have confirmed that higher levels of central bank independence are associated with lower and more stable rates of inflation. The autonomy of central banks is critical in a world where governments have an incentive to generate inflation - and thus depreciate the purchasing power of money - as a potential trade-off for temporary output and employment gains.

Exchange-market intervention is one of the more controversial policies that the Federal Reserve undertakes. Opponents of intervention fear that it can prove detrimental to the consistency and credibility of U.S. monetary policy Their concern starts with the observation that sterilized intervention is of limited effectiveness, but equally important to the controversy are a number of institutional considerations. This article discusses the institutional aspects of U.S. intervention from the decision to intervene to the investment of the proceeds. The author focuses primarily on interactions between the U.S. Treasury and the Federal Reserve System.