Fed Should Follow The Swiss National Bank Lead

On Tuesday, the Swiss National Bank (SNB) adopted a bold policy of pledging to sell Swiss Francs in an unlimited amount to ensure that the exchange rate viz-a-viz the euro is at least 1.2 Swiss Francs per euro. The exchange rate promptly jumped over 8 percent to a bit more than 1.2 Swiss Francs per euro. The SNB can clearly weaken its currency in this way, so long as its commitment is unwavering. The SNB did so, judging that this is the best available way of meeting its underlying macroeconomic objectives. Indeed, the SNB may not actually have to intervene heavily. It’s a nice case study in the power of credible commitment and rational expectations.