Oicuryy wrote: ↑
Thu Sep 27, 2018 11:41 pm
The economic benefit of the Fed's monetary policy efforts is a stable, predictable value of the dollar.
The value of a dollar, like the value of everything else, is determined by supply and demand. The Fed attempts to keep the supply of money growing slightly faster than demand so that the value of dollars declines about two percent per year.
As discussed in this thread
, banks can create money when they make loans. The Fed influences market interest rates in order to influence the demand for loans. That is how they attempt to manage the supply of bank-created money.
The US is something like 1/5th of world GDP (it's less than that now, but certainly in the 1980s it was that or more). The dollar also has the "exorbitant privilege" aka seigneurage of being the international currency of denomination and of reserve. Thus external parties hold dollars rather than exchanging them for their own currencies - estimated benefit to USA c. $50bn pa. That does not mean the Fed can overturn market forces.
Look at the Plaza Agreement (1985) and the move of the dollar up to that point, and down from there.
We live in the age of the "dirty float". I doubt the Fed actually can do much about the level of the dollar.
If we think of the Bank of England and Black Wednesday (September 1992) and the 20% devaluation against the Deutsche Mark that day, then we ca see that even a very powerful Central Bank, with 300 years of history, couldn't stop the currency markets and George Soros (he was merely the most prominent of many).
In some sense a US devaluation is never a "dollar crisis" because of the exorbitant privilege, as above. The US devalues but so many things are priced in dollars and so many parties hold dollars, that it is much less of a net loss in buying power. The same is true for a dollar appreciation.
The Fed has at best crude influence over this, if any at all.
Rather, I think it still works towards its mandate, stable growth of the US economy with limited inflation (but, inflation). The effect of the USD level is considered, but it's not their main policy target.
The exchange rate has an effect on the US economy but it is a small one -- the US economy is relatively closed (autarkic) compared to the other big economies which are much more export driven (Japan, Germany). If you strip out NAFTA*, then the US has a relatively small traded goods sector. Its biggest commodity imports, such as oil, are in fact priced in USD. Even car manufacturers tend to move their assembly and parts supply onshore to the USA or Mexico. Etc.
* less true of Mexico, but I would argue Canada is basically part of the USA from an economic point of view. A USA with state healthcare and its own currency, maybe, but an extension of the USA economically -- a supplier of raw materials like oil and softwood lumber, etc. to American industry and consumers. Mexico's manufacturing industry is a horizontally and vertically integrated supplier to US manufacturers, so the level of integration is very high at that level, the Canadian equivalents would be Quebec's aerospace industry and Ontario's automotive industry -- they are simply extensions of Ohio, say.
Canada in other words is a historical and geographical accident