Exchange Rate Question!!!?

Question

Do you think the Fed is very concerned about the behavior of the exchange rate of the $ in recent months? If so why? If not, why not?

Answer 1

Are we doing your homework?

Answer 2

The exchange rate of the dollar against foreign currencies should not have any role in Federal Reserve Policy. Policy of the Fed is based on US Economy, not the exchange between nations. That is a side effect of policy, not a factor of policy.

Answer 3

The Fed is indeed concerned about the behavior of the exchange rate. In a recent speech on June 3, 2008 (see link below), Fed Chairman Ben Bernanke said:

"In collaboration with our colleagues at the Treasury, we continue to carefully monitor developments in foreign exchange markets.  The challenges that our economy has faced over the past year or so have generated some downward pressures on the foreign exchange value of the dollar, which have contributed to the unwelcome rise in import prices and consumer price inflation.  We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations.  Over time, the Federal Reserve's commitment to both price stability and maximum sustainable employment and the underlying strengths of the U.S. economy--including flexible markets and robust innovation and productivity--will be key factors ensuring that the dollar remains a strong and stable currency."

While it unusual for a Fed Chairman to comment so directly on the dollar, it clearly indicates that the Fed is concerned about the exchange rate of the U.S. dollar in recent months.