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Home Front Economy
Fed may call for end to dollar peg for commodities
2008-06-27
Countries with overheating economies are contributing to inflation around the world by pushing up commodity prices, Don Kohn, the vice-chairman of the Federal Reserve, said on Thursday. His comments came in a speech in which he appeared to call on fast-growing emerging markets to drop their exchange rate pegs to the dollar and adopt independent monetary policies – so they no longer import Fed monetary policy.

Mr Kohn said “in those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability”. The Fed vice-chairman did not specify what steps he thought should be taken to restrain demand in these overheating countries.

However, he said economies “benefit from having independent monetary policies that provide room to respond flexibly” to different economic shocks. He added “these benefits could be increased if exchange rate flexibility were to become more widespread”.
Meanwhile the Euros and Brits blame it all on the Fed.
These remarks reflect Fed frustration at the way in which fixed exchange rate regimes transmit low interest rates meant to address US economic weakness to rapidly growing emerging economies – fuelling demand for commodities.

The Fed has never named any such regimes, although many economists point to rapidly growing economies in Asia, notably China, and some to the Middle East.

Mr KohnÂ’s speech suggests that the Fed believes that the global economic system would function better if these emerging economies had a greater degree of monetary independence, allowing them to set the interest rates appropriate for their own economies.

The reference to “global price stability” is striking because Mr Kohn has long championed the traditional view that inflation is still determined in separate monetary areas. While there is nothing to suggest that the Fed vice-chairman has abandoned this view, his speech highlights the potential for spillovers via commodity prices from countries within in effect the same monetary area and from countries in other monetary areas.

The Fed is thinking about whether the transmission of foreign overheating through commodity prices means that it needs to pay increased attention to measures of global capacity use. Traditionally a central bank focuses on domestic capacity utilisation – the balance between supply and demand in the economy – as a key determinant of inflation.
Posted by:lotp

#5  The Fed's contribution was holding interest rates too low for too long.

The Fed does that by supplying too many dollars. I will not disagree that bad loans were made and the Fed allowed that to happen. But that was done at the behest, nay, the demand, of the legislature. Creating too much money supply is the responsibility of the fed. And the problem did not start with housing, it started as far back as the Asian debt crisis of 1997 and hasn't stopped since as we have had bubble after bubble created with the Fed responding when it bursts by pumping in more liquidity to keep the markets afloat and ignite the next bubble. Time for the new Volker.
Posted by: Nimble Spemble   2008-06-27 10:59  

#4  Exactly - the run-up in oil isn't due to "speculation," it's due to investment dollars needing somewhere to go. When the paper Wall Street pushed in the credit bubble zeroed out, the money went into hard assets like gold, oil, grain...
Posted by: M. Murcek   2008-06-27 09:56  

#3  The Fed is in charge of the supply of dollars. They are producing too many. That isn't the only issue & may not even be the main one. Creation of loans contributes to the supply of dollars. The Housing Bubble was only possible due to a credit mania, where a huge amount of loans was made largely to deadbeats & scam artists. The Fed's contribution was holding interest rates too low for too long. Other elements of the government contributed by lax or non-enforcement of existing financial regulations.
Now that real estate is massively deflating, those with money to invest are pouring it into commodities in a last ditch effort for profits. There is no way that the demand for petro imports has increased 100% in 12 months to match the rise in oil prices. Oil being an essential element in world trade and in national economies, its price spike has affected almost all other commodities.
Posted by: Anguper Hupomosing9418   2008-06-27 09:32  

#2  If the Chinese want to pursue policies that are detrimental to Chinese consumers that's their business.

The Chinese pursue policies that keep the good o'boys in power. All else falls out from that. Not being capitalists, that means they're willing to eat billions of dollars if that means that Ma and Pa Lee are happy little peasants.
Posted by: Procopius2k   2008-06-27 08:36  

#1  For once I'm in agreement with the Brits and EUros. Greenspan's last 10 years were a disaster and Bernanke has done nothing to repair the damage. Inflation occurs because too many dollars are chasing too few goods. The Fed is in charge of the supply of dollars. They are producing too many.

The Fed should quit being a crybaby. If the Chinese want to pursue policies that are detrimental to Chinese consumers that's their business. It gives the Fed no excuse to pursue policies that are detrimental to US consumers. If the Fed still doesn't like what China's doping, it should recommend to the executive and legislature that we impose tariffs on Chinese imports.
Posted by: Nimble Spemble   2008-06-27 07:04  

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