Credibility for low inflation is the cornerstone of an effective monetary policy. And public support for Fed independence is the foundation of that credibility. Fed intervention in foreign exchange markets creates doubt about whether monetary policy will pursue low inflation or exchange rate objectives. Moreover, foreign exchange operations financed by the Fed undermine the Fed's independence, especially when they involve direct loans to foreign governments. For these reasons the authors recommend that the Fed be separated completely from foreign exchange operations with the Treasury.
Our Research Focus: Inflation and Monetary Policy
Amanda L. Kramer
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