During a recent staff meeting at LeBoeff Financial Capital Inc., Joe Hardy asked the firm’s in-house economist, Robin Heathers, to provide a discussion of the Federal Reserve’s intervention in the foreign exchange markets. At the meeting, Heathers made the following statements:
Statement 1: If the equilibrium dollar-rial exchange rate fluctuates between 150 rial/USD and 180 rial/USD and on average is 165 rial/USD, then the U.S. Fed can reduce exchange rate volatility by buying rials when the rate moves above 175 and selling rials for dollars when the rate moves below 155.
Statement 2: If the average equilibrium exchange rate moves from 165 rial/USD to 175 rial/USD, the U.S. Fed can intervene in the currency markets to return the equilibrium rate to 165.
With respect to these statements:
The Fed can intervene in the foreign exchange market. The primary reason the Fed would do so is to reduce exchange rate volatility in the short run. So, statement 1 is correct. However, if the underlying equilibrium rial/USD exchange rate increases from 165 to 175, the Fed cannot maintain the exchange rate at 165 rials/USD indefinitely. To do so, the Fed would have to sell dollars and buy foreign currency each day. The Fed would simply be accumulating rials. Eventually, the Fed would have to abandon any attempt to keep the exchange rate at a level different from the long-term equilibrium rate of 175. | 
发表于 2010-4-13 15:24
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