Balancing Inflation and Growth Part 11 of 13

One would like to think that as the economy slows, inflationary pressures will do likewise. But we cannot always be sure they will, given the globalized commodities trading system nature of the U.S. economy. Demand-pull pressures abroad have an increasingly potent influence on our domestic economy. Traditionally, a central bank would expect slack to develop as the economy under its jurisdiction weakened, leading to less demand for most inputs and an easing of price pressures. We no longer operate in a traditional economy. Domestic inflation developments have become increasingly less sensitive to domestic measures of slack. In an open, globalized economy, capacity utilization and inflation pressures need to be measured, or at a minimum, understood in their global context.

You cannot think in a purely domestic context about the pricing of oil or steel or soybeans or pulp or shoes or clothing or even what I consider to be one of lifes essentials, beer, because innovations in transportation and communications technology have all but eliminated national borders for almost any product for which trade barriers were negotiated away during the 1980s and 90s. More commodity training books vexing for economists and econometric modelers, the information technology revolution and the spread of the Internet have blurred the once-clear distinction between easy-to-trade goods and difficult-to-trade services.

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Balancing Inflation and Growth Part 7 of 13

At the same time, I am fully aware that the FOMC must be careful to not undermine that recuperative process. Here, of course, I refer to the potential harm to the consumer and the business and future trading software financial sectors alike by unwittingly allowing the perception to take hold that, as the New York Times editorialized in its lead front page article last Thursday, the Federal Reserve, signaled its readiness to bolster the economy with cheaper money even though inflation is picking up speed.

Talk of cheap money makes my skin crawl. The words imply a debased currency and inflation and the harsh medicine that inevitably must be administered to purge it. So you should not be surprised that I consider the perception that the Fed is pursuing a cheap-money strategy and commodity trading education, should it take root, to be a paramount risk to the long-term welfare of the U.S. economy.

I believe the Times overstates its case. Chairman Bernanke made clear in his congressional testimony last week that we are monitoring inflationary pressures and expectations closely. And yet, I understand the source of the Times sentiment. In a globalized capital market where money is free to move anywhere it pleases, there is scant tolerance for even the slightest whiff of inflation. Since the January FOMC meeting, longer-term rates, including those on fixed mortgages, have risen rather than followed the federal funds rate downward.

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Balancing Inflation and Growth Part 4 of 13

The Federal Reserve, unlike the Bank of England, has a dual mandate. We are charged with creating the monetary conditions to support sustainable noninflationary employment growth. We must keep our eyes on two things: economic growth and price pressures. Of course, this is easier said than done. It poses a conundrum of priority and balance. How should we weigh the risks of slow growth over the need to manage inflation? Reasonable men and women can agree that inflation is a sinister beast that, if untethered, will devour savings, erode the purchasing power of consumers, decimate returns on capital, undermine the reliability of financial accounting, distract the attention of corporate management and undercut employment growth and real wages. Thoughtful men and women can also agree that commodity trading courses at certain junctures, sluggish employment growth and financial instability present greater risks than inflation to the economic welfare of the nation. Both feverish price pressures and economic anemia matter, and both present great risk to our welfare. Both deserve our attention. But the question of the day is which deserves more of our attention right now.

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