The Federal Reserve as an Informed Foreign Exchange Trader: 1973–1995
by Michael D. Bordoa, Owen F. Humpageb, and Anna J. Schwartzc
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
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. In this context, most
U.S. interventions appear to have been too small to have had
a high probability of success. Other potential characteristics of
intervention—notably, coordination and secrecy—did not seem
to influence our success rates.
JEL Codes: F31, E52, E58.
(PDF, 33 pages 278 kb)
Discussion by Kathryn Dominguez
a Rutgers University
b Federal Reserve Bank of Cleveland
c National Bureau of Economic Research