Tuesday, August 13, 2013

The Federal Reserve System of the USA and Central Banks of the Other G-7 Countries

The Federal Reserve System of the USA and Central Banks of the Other G-7 Countries 

Like the other central banks, the Federal Reserve of the USA affects the 
foreign exchange markets in three general areas: 
• the discount rate; 
• the money market instruments; 
• foreign exchange operations. 
For the foreign exchange operations most significant are repurchase 
agreements to sell the same security back at the same price at a predetermined 
date in the future (usually within 15 days), and at a specific rate of interest. This 
arrangement amounts to a temporary injection of reserves into the banking 
system. The impact on the foreign exchange market is that the dollar should 
weaken. The repurchase agreements may be either customer repos or system 
Matched sale-purchase agreements are just the opposite of repurchase 
agreements. When executing a matched sale-purchase agreement, the Fed sells 
a security for immediate delivery to a dealer or a foreign central bank, with the 
agreement to buy back the same security at the same price at a predetermined 
time in the future (generally within 7 days). This arrangement amounts to a 
temporary drain of reserves. The impact on the foreign exchange market is that 
the dollar should strengthen. 
The major central banks are involved in foreign exchange operations in 
more ways than intervening in the open market. Their operations include payments 
among central banks or to international agencies. In addition, the Federal Reserve 
has entered a series of currency swap arrangements with other central banks since 
1962. For instance, to help the allied war effort against Iraq's invasion of Kuwait in 
1990-1991, payments were executed by the Bundesbank and Bank of Japan to the 
Federal Reserve. Also, payments to the World bank or the United Nations are executed 
through central banks. 
Intervention in the United States foreign exchange markets by the U.S. 
Treasury and the Federal Reserve is geared toward restoring orderly conditions 
in the market or influencing the exchange rates. It is not geared toward 
affecting the reserves. 
There are two types of foreign exchange interventions: naked intervention 
and sterilized intervention. 
Naked intervention, or unsterilized intervention, refers to the sole foreign 
exchange activity. All that takes place is the intervention itself, in which the 

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