After changing hands at more than 150 yen earlier this month, the dollar fell as low as 146.65 yen during Wednesday morning trading in Tokyo, the lowest level since Sept. 12, before recovering some ground. The dollar also fell against the euro. Federal Reserve governor Christopher Waller on Tuesday hinted that the central bank could start lowering interest rates if the decline in inflation continues. Waller said that "if we see this inflation continuing for several more months" then "you could then start lowering the policy rate just because inflation is lower." Waller also said that recent progress in taming inflation should allow the Fed to extend its pause in rate increases at least into early next year. The comments added to expectations that the interest-rate gap between the U.S. and Japan would stop widening, helping to push up the yen against the dollar...."

 

Source: Megumi Fujikawa, "U.S. Rate-Cut Possibility Pushes Down Dollar and Bond Yields", November 29, 2023

A) Discussed in the article above "...if we see this inflation continuing for several more months" then "you could then start lowering the policy rate just because inflation is lower..." What does the policy rate refer to? What monetary policy tools could be utilized to lower the policy rate by the Fed? Briefly explain.

B) Discuss the possible impacts on the trade balance between the U.S. and Japan, if the exchange rate of yen against the dollar is pushed up as expected.

Answer rating: 100% (QA)

A In the article the term policy rate refers to the interest rate set by the central bank which in this case is the Federal Reserve The policy rate is a key tool used by central banks to influence and ... View the full answer