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President Barack Obama stands with Ben Bernanke before making a statement on his reappointment as chairman of the Federal Reserve during the President’s vacation on Martha’s Vineyard, Massachusetts, Aug. 25, 2009.
Dr. Peter Morici: Wednesday, Ben Bernanke
will discuss with reporters decisions taken by the Federal Reserve Open Market
Committee. For this unprecedented press conference to be successful, Mr.
Bernanke must venture where Fed Chairmen are most reluctant to go—into politics.
Economists have long held that transparency about goals and means makes monetary
policy more effective. However, genuine transparency requires that Mr. Bernanke
acknowledge the limits imposed on the Fed policy by the actions of Congress, the
Administration, and foreign governments.
Inflation is heating up, thanks to rising oil, food and other commodity prices.
Many in Congress and financial markets blame QE2 (second installment of
quantitative easing) —the Fed’s policy of purchasing Treasury securities to
moderate interest rates on mortgages, corporate bonds and the like—but easy
money is not causing inflation.
China and several other Asian governments choose to keep their currencies
substantially undervalued against the dollar and regulate domestic gasoline and
other commodity prices. Those policies boost Asian exports and growth, slow US
and European growth, and push up global prices for oil and other commodities.
Growth in developing countries is inordinately energy and other-commodity
intensive, as greater prosperity translates into more cars, apartments and
commercial buildings, roads, and richer diets—more meat and milk that require
grains to produce. All that pushes up global prices for the oil, building
materials and food those economies must import in massive quantities to grow
Moreover, those governments must print and trade huge amounts of their
currencies for dollars with US and EU importers to keep their currencies from
rising in value against the dollar in foreign exchange markets. That gives those
governments piles of greenbacks to subsidize oil imports, keep domestic prices
for gas and diesel from rising too quickly, and shift the burden of tighter
global oil supplies onto the United States, Europe, and poorer developing
In the United States, the immediate result is soaring gas and food prices, even
as unemployment remains uncomfortably high and wages hardly keep pace with
The Fed can do little about the actions of foreign governments to control that
inflation, but the United States is not helpless. Economists on the right, the
left and in the center have articulated policies the Treasury could pursue, in
addition to G-20 diplomacy, to neutralize Beijing’s and other government’s
currency manipulation. President Obama has acknowledged the potential
effectiveness of those options but nixed their use.
Ben Bernanke has articulated the connection between Beijing’s exchange rate
policy and slower US growth, and he well understands the direct connection
between China’s currency policies and protectionism, on the one hand, and US oil
and food inflation, on the other.
Mr. Bernanke would do his cause, and the nation’s understanding of the choices
he faces, a lot of good if he would articulate the connection between China’s
currency manipulation and rising gas and food prices, the limits of Fed power to
manage inflation, and the options available to the Treasury to accomplish
solutions. However, Mr. Bernanke won’t embarrass a Treasury Secretary and
President too timid to act, and will continue to carry the pail for the
Year-over-year, energy prices are up 16%—gasoline, 28%—and food prices have
increased 3%, while inflation on other items is barely more than one%.
Considering the latter include health care and college tuition, where government
policies drive prices ever higher, inflation in the free-market private sector
is no more than one% a year.
Easy monetary policy causes inflation when the economy is near full
employment—then too much money chases too few goods. But with 8.8% unemployment,
wages are hardly moving, and productivity growth has permitted firms to absorb
much of the cost of higher energy and other commodity prices.
Simply, low interest rates and QE2 are not driving inflation. If members of
Congress, like Representative Ron Paul, want inflation fixed, they should
address currency and trade problems with China. However, they are reluctant to
seize exchange rate policy from the Treasury and President. Instead, they score
points and troll for votes by trashing the Fed, and will continue to do so,
until Mr. Bernanke pushes back.
This is the core of Mr. Bernanke’s challenge on Wednesday. The Fed is supposed
to be non-political; but if he is to explain monetary policy to the public—its
purposes and limits—and create the transparency economists believe improves Fed
effectiveness, he must be political.
On the blackboards of graduate seminars, economics is physics—energy, actions
and reactions— but in Washington it’s nothing more or less than raw politics.
Countdown to the Fed Press Conference:
Professor, Robert H. Smith School of Business, University of Maryland,