I have continually stressed the need for the Fed to (1) publicly and forcefully announce a level target and to (2) back up such an announcement with a commitment to buy up as many assets as needed so that the target is hit. Well, the Swiss National Bank has amazingly just done that in a way that would make Lars E. O. Svensson proud. Below is the press release (my bold):
The current massive overvaluation of the Swiss franc poses an acute threat to the Swiss economy and carries the risk of a deflationary development.The Swiss National Bank (SNB) is therefore aiming for a substantial and sustained weakening of the Swiss franc. With immediate effect, it will no longer tolerate a EUR/CHF exchange rate below the minimum rate of CHF 1.20. The SNB will enforce this minimum rate with the utmost determination and is prepared to buy foreign currency in unlimited quantities.
Even at a rate of CHF 1.20 per euro, the Swiss franc is still high and should continue to weaken over time. If the economic outlook and deflationary risks so require, the SNB will take further measures.
Any question as to the SNB's resolve here? Didn't think so. Swiss monetary officials are concerned about weakening economic activity and deflation and therefore have made a forceful, unambiguous commitment to expand the central bank's balance sheet until these problems are gone. Moreover, in the last sentence they note more will be done if necessary.
Someone I know in the financial industry in Europe wrote me the following when the SNB made this announcement:
The trading floor that I am sitting for very natural reasons exploded in trading activity and general jubilation on the announcement...
Now we can only hope that the ECB and the Fed learn a bit...
Indeed. First the Fed gets schooled on central banking by the Swedish central bank and now by the Swiss National Bank. This is getting embarrassing. It is like watching a talented basketball player getting dunked on by Kobe Bryant and then by Lebron James. Normally, such a talented basketball player would go study these other players and learn from them. But the Fed seems determined to get repeatedly dunked on. Fortunately, it has a teammate, the ECB, that is willing to get dunked on too and thus share the embarrassment. It is time for the Fed and the ECB to go back to basketball camp. I recommend the ones put on by the Swedes and Swiss.
HT: Lars Christensen
HT: Lars Christensen