Protecting the Federal Reserve

Last week, President Trump tweeted his intention to nominate Dr. Judy Shelton to the Board of Governors of the Federal Reserve System. In our view, Dr. Shelton fails to meet the criteria that we previously articulated for membership on the Board. We hope that the Senate will block her nomination.

Our opposition arises from four observations. First, Dr. Shelton’s approach to monetary policy appears to be partisan and opportunistic, posing a threat to Fed independence. Second, for many years, Dr. Shelton argued for replacing the Federal Reserve’s inflation-targeting regime with a gold standard, along with a global fixed-exchange rate regime. In our view, this too would seriously undermine the welfare of nearly all Americans. Third, should Dr. Shelton become a member of the Board, there is a chance that she could become its Chair following Chairman Powell’s term: making her Chair would seriously undermine Fed independence. Finally, Dr. Shelton has proposed eliminating the Fed’s key tool (in a world of abundant reserves) for controlling interest rates—the payment of interest on reserves….

China's Awkward Exchange Rate Regime: an Update

As 2016 draws to a close, it’s natural to look back over the year’s posts. With all the swirling concerns about China-U.S. relations—including the selection of the protectionist co-author of Death by China to head a new White House National Trade Council—we wondered whether our February doubts about China’s exchange rate regime remain intact.

The answer is yes, but for reasons radically inconsistent with President-elect Trump’s promise to declare China a currency manipulator on his first day in office. Like any country with a fixed exchange rate, China’s central bank intervenes actively to maintain its (evolving) currency target. But, for the past two years, the People’s Bank has been intervening to prevent (or at least to slow), rather than promote, the depreciation of its currency versus the dollar. That is, the RMB remains overvalued compared to what it would be in the absence of official intervention.

And, despite secretive instincts of China's authorities, the evidence is there for all to see....

China's Awkward Exchange Rate Regime

A recent op-ed in a major Chinese English-language newspaper, The People’s Daily, asserts that George Soros “has declared ‘war’ on China, claiming he had sold short Asian currencies.” For those who observed firms like those of Mr. Soros profiting from the collapse of the British pound in 1992, a speculative attack on China’s currency, the RMB, merits close attention.

There are surely parallels to that earlier episode where Soros' firm is reputed to have made $1 billion in a couple of days. Yet, it would be difficult to overlook the enormous differences. Perhaps most important, the United Kingdom was committed to maintaining the free flow of capital across its borders. This is in stark contrast to China, where policymakers have been tightening capital controls in recent months....

A Swiss Lesson in Time (Consistency)

You can set your watch by the Swiss trains. They are the envy of the world in many ways. Everyone believes that the trains will run on time because they do.

Credibility is at the core of central banking as well. When a credible central banker speaks, households, businesses, and governments listen. And, because they expect the banker to do what she says, their response – measured in terms of how much they work, save, and invest – will reinforce the outcome policymakers seek.

But credibility is tough to earn and – as the Swiss National Bank (SNB) recently learned when it ended a three-year commitment to prevent a rise in the franc versus the euro – easy to lose....

Commentary

Money, Banking, and Financial Markets