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The Federal Reserve and Treasury Secretary Paulson are doing everything possible to try to lead the US dollar to strengthen. Indeed, FOMC members such as Chairman Bernanke and Vice Chairman Kohn have harped upon inflation pressures, suggesting that the central bank my raise interest rates. Meanwhile, Mr. Paulson went so far as to suggest the Treasury may even intervene in the currency markets. Are any of these actions likely? No. However, as we’ve seen over the past week or so, a little jawboning goes a long way.

US Fed: Doing Everything Possible To Strengthen the US Dollar

The Federal Reserve and Treasury Secretary Paulson are doing everything possible to try to lead the US dollar to strengthen. Indeed, FOMC members such as Chairman Bernanke and Vice Chairman Kohn have harped upon inflation pressures, suggesting that the central bank my raise interest rates. Meanwhile, Mr. Paulson went so far as to suggest the Treasury may even intervene in the currency markets. Are any of these actions likely? No. However, as we’ve seen over the past week or so, a little jawboning goes a long way.

Henry Paulson, US Treasury Secretary

			“I would never take intervention off the table or any policy tool off the table. I just can't speculate about what we will or won't do.” – June 9, 2008

Ben Bernanke, Federal Reserve Chairman (Voting Member)

			“Forecasting and controlling inflation are, of course, central to the process of making monetary policy.” – June 9, 2008
			“Despite the unwelcome rise in the unemployment rate that was reported last week, the recent incoming data, taken as a whole, have affected the outlook for economic activity and employment only modestly.” – June 9, 2008
			“Inflation has remained high, largely reflecting sharp increases in the prices of globally traded commodities…Moreover, the latest round of increases in energy prices has added to the upside risks to inflation and inflation expectations.  The Federal Open Market Committee will strongly resist an erosion of longer-term inflation expectations, as an unanchoring of those expectations would be destabilizing for growth as well as for inflation.” – June 9, 2008
			“Because monetary policy works with a lag, the short-term inflationary effects of a sharp increase in oil prices can generally not be fully offset….we recognize that keeping longer-term inflation expectations well anchored is essential to achieving the goal of low and stable inflation. Maintaining confidence in the Fed's commitment to price stability remains top priority as the central bank navigates the current complex situation.” – June 4, 2008

Donald Kohn, Federal Reserve Vice Chairman (Voting Member)

			“It may be efficient to allow some adjustment period in which both overall inflation exceeds its desired low level and the unemployment rate is higher than its long-run sustainable level… it is very important to ensure that policy actions anchor inflation expectations. This anchoring is critical: As demonstrated by historical experiences around the world and in the United States in the 1970s and 1980s, efforts to bring inflation and inflation expectations back to desirable levels after they have risen appreciable involve costly and undesirable changes in resource utilization.” – June 11, 2008

Randall Kroszner, Federal Reserve Governor (Voting Member)

			“Credit is the lifeblood of the American economy…Today's economy relies on consumer spending as an engine of growth--it accounts for about 70 percent of the gross domestic product.  Credit is an important underpinning to such spending. Overall, evidence from the Federal Reserve's Survey of Consumer Finances shows that about three-quarters of all households carry some debt…about 75 percent of consumers hold credit cards…Because consumer credit plays a central role in the economy, the Federal Reserve has a macroeconomic interest in facilitating the efficient functioning of consumer credit markets.” – June 11, 2008

ECB: In Case You Doubted Trichet’s Hawkishness…

European Central Bank President Trichet, who is arguably the most hawkish central bank chief in the world, made it known to everyone that price stability remains the primary determinant of monetary policy in the Euro-zone last week. In fact, Mr. Trichet even said that some policy makers wanted to raise rates in June, and that the ECB may hike during their next meeting in July. While credit conditions may not be completely calm quite yet, it appears that the ECB is prepared to tighten monetary policy in the near-term in order to combat rising price pressures.

Jean-Claude Trichet, European Central Bank President

			“…we noted that risks to price stability over the medium term have increased further. Inflation rates have risen significantly since the autumn of last year, owing mainly to strong increases in energy and food prices…. At the same time, the economic fundamentals of the euro area are sound. Against this background, we emphasize that maintaining price stability in the medium term is our primary objective in accordance with our mandate. The Governing Council…is in a state of heightened alertness…It is our strong determination to secure a firm anchoring of medium and long-term inflation expectations in line with price stability.” – June 5, 2008
			“A number of us considered that there was a case for increasing rates, but at a later date, and some amongst us considered that there was not necessarily a case for doing so.” – June 5, 2008
			“As you know we are never pre-committed. We always analyze the exact situation on the basis of all information we have at the moment when we take the decision. I said it is not excluded that we will take that decision at our next decision-making meeting, namely at the beginning of July. It is not certain; it is possible.” – June 5, 2008

Christian Noyer, European Central Bank Governing Council Member

			“I remain confident about the fact that the rise in prices should slow progressively in the second half and at the beginning of next year, as long as we continue to avoid the development of second-round effects…In fact, inflation should slow progressively and fall into line with the ECB's medium term price objectives once external price shocks in energy and commodities markets subside…We have signaled that we are in a state of advanced alert and although we have decided (up to now) to maintain our rates at an unchanged level, we don't exclude moving rates a little at our next meeting.” – June 11, 2008

Juergen Stark, European Central Bank Executive Board Member

			“The markets have understood the Governing Council's signal. However, we are not talking about a series of rate increases…growth is very likely to slow in the second quarter…We will see a gradual recovery as soon as the second half of this year.” – June 11, 2008

Lucas Papademos, European Central Bank Vice-President

			“Over the past two months, money, credit and other financial markets appear to be sending mixed signals…One way of reconciling these seemingly mixed messages is to examine the relative contributions of counterparty risk and liquidity risk factors to money market spreads…. It shows that the role of credit risk seems to have diminished, while the contribution of other factors increased after mid-March, as liquidity concerns in money markets rose following the collapse of Bear Stearns, which induced banks to hoard more liquidity.” – June 9, 2008