On the evolution of U.S. foreign-exchange-market intervention: thesis, theory, and institutions

Attitudes about foreign-exchange-market intervention in the United States evolved in tandem with views about monetary policy as policy makers grappled with the perennial problem of having more economic objectives than independent instruments with which to achieve them. This paper—the introductory chapter to our history of U.S. foreign exchange market intervention—explains this thesis and summarizes our conclusion: The Federal Reserve abandoned frequent foreign-exchange-market intervention because, rather than providing a solution to the instruments-versus-objectives problem, it interfered with the Federal Reserve’s ability to credibly commit to low and stable inflation. This chapter also provides a theoretical discussion of intervention, background on U.S. institutions for conducting intervention, and a roadmap to the remainder of our book.Foreign exchange market ; Monetary policy - United States

Bretton Woods and the U.S. decision to intervene in the foreign-exchange market, 1957-1962

The deterioration in the U.S. balance of payments after 1957 and an accelerating loss of gold reserves prompted U.S. monetary authorities to undertake foreign-exchange-market interventions beginning in 1961. We discuss the events leading up to these interventions, the institutional arrangements developed for that purpose, and the controversies that ensued. Although these interventions forestalled a loss of U.S. gold reserves, in the end, they only delayed more fundamental adjustments and, in that respect, were a failure.Foreign exchange administration ; Bretton Woods Agreements Act

A brief empirical history of U.S. foreign-exchange intervention: 1973-1995

This paper assesses U.S. foreign-exchange intervention since the inception of generalized floating. We find that intervention was by and large ineffectual. We first identify which interventions were successful according to three criteria. Then, we test whether the number of observed successes significantly exceeds the amount that would randomly occur given the near-martingale nature of daily exchange-rate changes. Finally, we investigate whether the various characteristics of an intervention - its size, frequency, or coordination - can increase the probability of success. We find that intervention did tend to moderate same-day exchange-rate movements relative to the previous day, but this effect is not robust across subperiods or currencies and it occurs infrequently. Increasing the size of an intervention increases the probability of success, but no other variable consistently makes a difference, including coordinating interventions with other central banks.Foreign exchange administration

The Federal Reserve as an informed foreign-exchange trader: 1973-1995

If official interventions convey private information useful for price discovery in foreign-exchange markets, then they should have value as a forecast of near-term exchange-rate movements. Using a set of standard criteria, we show that approximately 60 percent of all U.S. foreign-exchange interventions between 1973 and 1995 were successful in this sense. This percentage, however, is no better than random. U.S. intervention sales and purchases of foreign exchange were incapable of forecasting dollar appreciations or depreciations. U.S. interventions, however, were associated with more moderate dollar movements in a manner consistent with leaning against the wind, but only about 22 percent of all U.S. interventions conformed to this pattern. We also found that the larger the size of an intervention, the greater was its probability of success, although some interventions were inefficiently large. Other potential characteristics of intervention, notably coordination and secrecy, did not seem to influence our success rates.Board of Governors of the Federal Reserve System (U.S.) ; Foreign exchange

U.S. foreign-exchange-market intervention during the Volcker-Greenspan era

The Federal Reserve abandoned foreign-exchange-market intervention because it conflicted with the System’s commitment to price stability. By the early 1980s, economists generally concluded that, absent a portfolio-balance channel, sterilized foreign-exchange-market intervention did not provide central banks with a mechanism for systematically influencing exchange rates independent of their monetary policies. If intervention were to have anything other than a fleeting, hit-or-miss effect on exchange rates, monetary policy had to support it. Exchange rates, however, often responded to U.S. monetary-policy initiatives, so intervention to offset or reverse those exchange-rate responses can seem a contrary policy move and can create uncertainty about the strength of the System's commitment to price stability. That the U.S. Treasury maintained primary responsibility for foreign-exchange intervention only compounded this uncertainty. In addition, many FOMC participants feared that swap drawings and warehousing could contravene the Congressional appropriations process and, therefore, potentially pose a threat to System independence, a necessary condition for monetary-policy credibility.Banks and banking, Central ; Foreign exchange administration ; Monetary policy ; Federal Open Market Committee

U.S. monetary-policy evolution and U.S. intervention

The United States all but abandoned its foreign-exchange-market intervention operations in late 1995, when they proved corrosive to the credibility of the Federal Reserve?s commitment to price stability. We view this decision as the culmination of the evolution of U.S. monetary policy over the past century from a gold standard to a fiat money regime. The abandonment of intervention was necessary to secure monetary policy credibility.Foreign exchange market ; Monetary policy - United States ; Federal Open Market Committee

U.S. intervention during the Bretton Wood Era:1962-1973

By the early 1960s, outstanding U.S. dollar liabilities began to exceed the U.S. gold stock, suggesting that the United States could not completely maintain its pledge to convert dollars into gold at the official price. This raised uncertainty about the Bretton Woods parity grid, and speculation seemed to grow. In response, the Federal Reserve instituted a series of swap lines to provide central banks with cover for unwanted, but temporary accumulations of dollars and to provide foreign central banks with dollar funds to finance their own interventions. The Treasury also began intervening in the market. The operations often forestalled gold losses, but in so doing, delayed the need to solve Bretton Woods’ fundamental underlying problems. In addition, the institutional arrangements forged between the Federal Reserve and the U.S. Treasury raised important questions bearing on Federal Reserve independence.Banks and banking, Central ; Foreign exchange administration ; Federal Open Market Committee ; Gold ; Bretton Woods Agreements Act

U.S. intervention and the early dollar float: 1973-1981

The dollar’s depreciation during the early floating rate period, 1973–1981, was a symptom of the Great Inflation. In that environment, sterilized foreign exchange interventions were ineffective in halting the dollar’s decline, but they showed a limited ability to smooth dollar movements. Only after the Volcker FOMC changed its monetary-policy approach and demonstrated a willingness to maintain a disinflationary stance despite severe economic weakness and high unemployment did the dollar begin a sustained appreciation. Also contributing to the ineffectiveness of the interventions was the Desk’s method of operation. The small, covert interventions, particularly prior to 1977, seemed inconsistent with an expectations channel of influence, and financing intervention with short-term borrowed funds seemed inconsistent with a portfolio-balance channel of influence. The Desk never clearly articulated an intervention transmission mechanism. The episode indicated the shortcomings of sterilized intervention and led to their cessation in April 1981.Banks and banking, Central ; Foreign exchange administration ; Monetary policy ; Federal Open Market Committee

Ion kinetic energy conservation and magnetic field strength constancy in multi-fluid solar wind Alfv\'enic turbulence

We investigate properties of the plasma fluid motion in the large amplitude low frequency fluctuations of highly Alfv\'enic fast solar wind. We show that protons locally conserve total kinetic energy when observed from an effective frame of reference comoving with the fluctuations. For typical properties of the fast wind, this frame can be reasonably identified by alpha particles, which, owing to their drift with respect to protons at about the Alfv\'en speed along the magnetic field, do not partake in the fluid low frequency fluctuations. Using their velocity to transform proton velocity into the frame of Alfv\'enic turbulence, we demonstrate that the resulting plasma motion is characterized by a constant absolute value of the velocity, zero electric fields, and aligned velocity and magnetic field vectors as expected for unidirectional Alfv\'enic fluctuations in equilibrium. We propose that this constraint, via the correlation between velocity and magnetic field in Alfv\'enic turbulence, is at the origin of the observed constancy of the magnetic field: while the constant velocity corresponding to constant energy can be only observed in the frame of the fluctuations, the correspondingly constant total magnetic field, invariant for Galilean transformations, remains the observational signature, in the spacecraft frame, of the constant total energy in the Alfv\'en turbulence frame.Comment: 6 pages, 6 figures, Accepted for publication in The Astrophysical Journa