The Federal Reserve as an Informed Foreign-Exchange Trader

U.S. exchange-market interventions have no apparent effect on market fundamentals, but may influence expectations. If intervention can accurately forecast exchange-rate movements, knowledge that the Federal Reserve was trading will cause traders to alter their prior estimates of the distribution of exchange-rate changes. This paper finds that U.S. intervention has value only as a forecast that recent exchange-rate movements will moderate, but not that they will reverse. Less than half of the interventions, however, seem successful, and the favorable results are generally confined to two relatively short periods that are characterized by uncertainty about future Federal Reserve policies.