The Federal Reserve as an Informed Foreign-Exchange Trader: 1973-1995

Abstract

If offi cial 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 ineffi ciently large. Other potential characteristics of intervention, notably coordination and secrecy, did not seem to infl uence our success rates. There is no evidence, nor does anybody here [in the FOMC] believe that there is any evidence, to confirm that sterilized intervention does anything.