Rather than forcing ourselves to act on both instruments almost simultaneously (which could fuel fears of an excessively brutal effect), we could give ourselves more time and consider the latest inflation outlook before deciding about the calendar of rate hikes: a decision that anyway we don’t need to make before our June meeting. Any speculation about this calendar of future lift-off is at this stage premature. The forward guidance on interest rates Let me stress here an important semantic point about our monetary stance: the steps I am discussing here are about the normalization of our monetary policy, not about tightening. It’s still the exit from exceptional instruments and an extremely accommodative monetary policy (increase of the already large assets stock, negative interest rates). It’s the first phase of a gradual return towards a more neutral stance, which we are still far from. Tightening would be another story, going beyond a neutral stance, which is not within our present policy horizon. Let me then remind you of the three state-dependent criteria on our forward guidance: “the Governing Council sees (i) inflation reaching 2 per cent well ahead of the end of its projection horizon; (ii) and durably for the rest of the projection horizon; and (iii) it judges that realised progress in underlying inflation is sufficiently advanced to be consistent with inflation stabilising at two per cent over the medium term”.
Fifth, the risk of default on the country’s sovereign debt must be viewed as negligible, to ensure both that the currency is a stable store of value and that continuous, deep liquid domestic markets will be available regardless of the economic circumstances. Sixth, the country must have a credible central bank that is insulated from political interference and committed to keeping inflation low and stable – a necessary condition for a reserve currency to be a reliable store of value. I think that the U.S. dollar satisfies these general criteria. That is why over 60 percent of foreign exchange reserve holdings are denominated in dollars – a share that has been quite stable in recent years. The dollar’s share has remained steady despite the presence of a number of currencies that broadly satisfy the attributes that I have just discussed. But should the U.S. be concerned if more countries satisfy the attributes needed to be successful reserve currencies? Would it be problematic for the United States if the U.S.  BIS central bankers’ speeches  1  dollar share of foreign exchange holdings slipped over time because of progress made elsewhere? I think the answer to both of these questions is “no.” It would seem positive to me if a decline in the U.S. market share reflected the following developments: a greater number of stable and effective central banks and fiscal authorities, more investors who are reassured about countries’ institutional arrangements and financial stability, and deeper and more liquid capital markets outside the United States.