
Fed rate hikes don't affect the US dollar the way we think - prostoalex
https://qz.com/1378352/fed-rate-hikes-dont-affect-the-us-dollar-the-way-we-think/
======
CompelTechnic
Imagine you are in an empty room with a digital screen on the wall. The screen
says 76°F. Over the next few days, you feel the temperature drop and rise over
time, and the value on the screen always changes accordingly. You know that
the real temperature and the value on the display are related, but you do not
know whether the display is a thermostat or a thermometer.

Fed rate effects are difficult to measure for the same reason that the
thermometer/thermostat problem exists. You cannot disambiguate cause from
effect when monetary policy is used as a control system.

~~~
grenoire
That is a case of correlation is not causation, and it's essentially one of
the biggest problems faced by macroeconomists and policymakers alike
(alongside... many other fields, of course). Unfortunately there's no way to
determine causality without extensive experimentation, and more unfortunately
monetary and fiscal policy do not allow for the same playgrounds that other
fields have access to. We _know_ certain policies _work_ , but for those
what's then missing is to what extent.

~~~
0x8BADF00D
It is also hard to measure the value of a dollar. Since it is also the unit of
account.

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IAmGraydon
The author doesn't seem to understand that currency moves are based on
predicted future rates, not current rates. By time a rate change happens, it
is often expected and the currency value rises (or falls) until the change is
actually announced, at which point it can paradoxically drop (or climb) due to
the market now predicting the next move. The change is said to be "priced in"
when this happens. So what actually moves the currency values are the economic
indicators upon which the Fed bases its rate decisions, not the rate decisions
themselves (unless, of course, a rate decision is announced which is a
complete surprise).

~~~
mortehu
CME has a simple web tool to see the market’s expectations about future rates,
for those interested: [https://www.cmegroup.com/trading/interest-
rates/countdown-to...](https://www.cmegroup.com/trading/interest-
rates/countdown-to-fomc.html)

E.g. a September rate hike is expected with a 99.8% probability by the market.
For December the probability is 79.8%.

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rapsey
Just printing money does not mean inflation is a result. For inflation to
occur you also need money velocity.

What the FED has done is print a whole lot of money, but that money has
largely stayed within the big banks and wall street.

Not as much has moved to the real economy because money velocity is low.
Though inflation has picked up in the last few years.
[https://fred.stlouisfed.org/series/M2V](https://fred.stlouisfed.org/series/M2V)

~~~
getcrunk
Can u justify your first scentence? In my head (did not study Econ) x is all
the actual economic value in a country and it’s divided by the money supply.
You increase the money supply in a fixed moment (print money) that ratio
changes and stuff is worth less or costs more (inflation). So yea please
explain how simply printing money doesn’t cause inflation

~~~
setr
If I understood him correctly: if the money never actually moves, that is,
enters the economy properly, then it’d have no effect on it. ie a savings
account (to you, personally) is the same as never having received the money in
the first place, until the day its spent. If you never spend it, then it may
as well not existed.

In the same fashion, the printing of money has no effect if no one ever sees
it. The more people who deal with it, the larger an effect it will have

~~~
hcknwscommenter
Your statement is headed in the right direction, but misses some important
subtleties. Money in the bank, even if you never spend it, can have velocity
because the bank can use that deposit money for fractional reserve lending.
Also, and very importantly, velocity has a multiplier effect, so small changes
can be more important than one might intuitively expect. If you dramatically
increase money supply, but velocity dramatically decreases, depending on the
relative amounts of both, you may have inflation or deflation. In other words,
both aspects supply and velocity are important.

This ties into the infamous parable of the Greek hotelier, where you can see
that it is the movement of money that has the greatest impact on the economy:

It is a slow day in a little Greek village. The rain is beating down and the
streets are deserted. Times are tough, everybody is in debt, and everybody
lives on credit. On this particular day a rich German tourist is driving
through the village, stops at the local hotel and lays a €100 note on the
desk, telling the hotel owner he wants to inspect the rooms upstairs in order
to pick one to spend the night. The owner gives him some keys and, as soon as
the visitor has walked upstairs, the hotelier grabs the €100 note and runs
next door to pay his debt to the butcher. The butcher takes the €100 note and
runs down the street to repay his debt to the pig farmer. The pig farmer takes
the €100 note and heads off to pay his bill at the supplier of feed and fuel.
The guy at the Farmers' Co-op takes the €100 note and runs to pay his drinks
bill at the taverna. The publican slips the money along to the local
prostitute drinking at the bar, who has also been facing hard times and has
had to offer him "services" on credit. The hooker then rushes to the hotel and
pays off her room bill to the hotel owner with the €100 note. The hotel
proprietor then places the €100 note back on the counter so the rich traveler
will not suspect anything. At that moment the traveler comes down the stairs,
picks up the €100 note, states that the rooms are not satisfactory, pockets
the money, and leaves town.

No one produced anything. No one earned anything. However, the whole village
is now out of debt and looking to the future with a lot more optimism.

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kaycebasques
I was expecting more historical evidence to support this argument. I’m not
saying I have an opinion on whether it’s wrong or right, but I would like to
see how the dollar performed during previous rate hikes.

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benlorenzetti
To HN: Is there a body of economic theory or a good text that separates
inflation of the base currency from some other term that captures its relative
value to other currencies?

~~~
T-A
Big topic with plenty of proposed answers, none of which works particularly
well. There is a summary of common ones here:

[http://www.economicsdiscussion.net/foreign-
exchange/theories...](http://www.economicsdiscussion.net/foreign-
exchange/theories-foreign-exchange/theories-of-exchange-rate-determination-
international-economics/30637)

~~~
benlorenzetti
Thanks! To all the others too.

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nabla9
The premise of this article does not make sense to me. Why would anyone think
as the author does?

Increasing rates is attempt to control price inflation, not to control
exchange rates. There is a link but, it's not straight nor is it the most
important factor.

You should look at the balance on current account, and export and import price
indexes, net investment flows etc.

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jnordwick
The supply-siders have been saying this since Reagan was in office.

Jude Wanniski's wrote similar statements in his newsletters and book: "how do
you expect to make something more valuable by making it more expensive" (the
interest rate being the price of money).

Looking at actual rates, not targets, the overnight target is a blunt
instrument that doesn't always follow the target very well. And even when it
does, the exchange rate relationship seems to take long vacations.

Art Laffer had similar views IIRC from a paper he did looking at the trade-
weak dollar connection.

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geggam
I think the scale of the fiat currency and economics in the US allows for
sectors to fluctuate wildly without impacting others.

I also think the current state of economics is a complete unknown to everyone
who tries to influence it.

Fortunes can be made and lost over things like bitcoin where chaos seems to be
the main driver of value.

Interesting times to say the least.

