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The market's nerves have also been rattled by Bill Clinton's new nominees to the Fed's Board of Governors: Alan Blinder and Janet Yellen are both suspected
of being soft on inflation. This, in combination with the cheap-dollar policy, has cast serious doubt on the administration's support for the Fed's anti-inflation
policyand at the very time when some leading indicators of inflation are starting to flash. With the American economy in its fourth year of expansion,
the remaining slack is fast disappearing. Unemployment, at 6.4% of the labour force, is now within a whisker of the rate at which inflation lids often
started to climb; and commodity prices are rising. All the more important that the administration does not make the Fed's job harder through foolish talk.
Over the past year, the administration has displayed a worrying misunderstanding of the use of exchange rates as a tool of economic policy. The trouble
with the textbook theory that a rise in the yen will trim Japan's trade surplus is that it assumes governments can steer currencies without touching fiscal
or monetary levers. They cannot, except very briefly-and, even then, unpredictably. The yen-dollar exchange rate, for example, is influenced by investor's
expectations about the relative tightness of monetary policy in America and Japan. America's former desire for a cheap dollar implied a willingness to
run a lax monetary policy, which, pushed up inflationary expectations and hence bond yields. In Japan, in contrast, the severe overvaluation of the yen
of being soft on inflation. This, in combination with the cheap-dollar policy, has cast serious doubt on the administration's support for the Fed's anti-inflation
policyand at the very time when some leading indicators of inflation are starting to flash. With the American economy in its fourth year of expansion,
the remaining slack is fast disappearing. Unemployment, at 6.4% of the labour force, is now within a whisker of the rate at which inflation lids often
started to climb; and commodity prices are rising. All the more important that the administration does not make the Fed's job harder through foolish talk.
Over the past year, the administration has displayed a worrying misunderstanding of the use of exchange rates as a tool of economic policy. The trouble
with the textbook theory that a rise in the yen will trim Japan's trade surplus is that it assumes governments can steer currencies without touching fiscal
or monetary levers. They cannot, except very briefly-and, even then, unpredictably. The yen-dollar exchange rate, for example, is influenced by investor's
expectations about the relative tightness of monetary policy in America and Japan. America's former desire for a cheap dollar implied a willingness to
run a lax monetary policy, which, pushed up inflationary expectations and hence bond yields. In Japan, in contrast, the severe overvaluation of the yen
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