The Effect Of Federal Reserve’s Monetary Policy On The RMB Exchange Rate

The importance of the exchange rate as the most direct link between the US dollar and the RMB is further highlighted by the growing ties between China and the US,which are the world’s largest developing and developed countries,respectively.Currently,China’s economic operating environment is in a constant state of change.Against this background,it is important to study the impact of the Fed’s monetary policy adjustments on the RMB exchange rate for the monetary authorities to maintain the stability of the foreign exchange market and for investors to properly manage their risks.This paper adopts a combination of theoretical and empirical analysis,first reviewing the history of China’s exchange rate reform and the evolution of the Fed’s monetary policy,and then briefly analyzing the causes of the Fed’s monetary policy affecting the RMB exchange rate and the transmission path of the spillover effect.Based on the theoretical analysis,this paper uses the event study method to study the impact of the Fed’s monetary policy adjustment on the RMB exchange rate from multiple dimensions by constructing a regression model.The empirical results show that the Fed monetary policy adjustment can significantly affect the RMB exchange rate,and the expected Fed monetary policy adjustment has a significantly positive effect on the RMB exchange rate,while the Fed forward guidance does not have a significant effect on the RMB exchange rate.From the results of the segmentation study,with the further marketization of the RMB,the impact of the Fed’s monetary policy adjustments on the RMB exchange rate is gradually increasing,and after the "811" exchange rate reform,the Fed’s forward-looking guidance affects the RMB exchange rate yield at the 5%significance level.In addition,the Fed’s monetary policy adjustment can also significantly affect the volatility of the RMB exchange rate.Finally,in response to the empirical results,this paper puts forward four recommendations to help China’s monetary authorities better cope with external shocks and foreign exchange market participants better formulate risk management strategies.