Global factors may on balance have boosted U.S. inflation, but globalization has not affected the ability of the Federal Reserve to influence U.S. financial conditions, Fed Chairman Ben Bernanke said on Friday.
"When the offsetting effects of globalization on the prices of manufactured imports and on energy and commodity prices are considered together, there seems to be little basis for concluding that globalization overall has significantly reduced inflation in the United States in recent years; indeed the opposite may be true," he said in a speech at Stanford University.
Bernanke did not speak about the outlook for interest rates, economic growth or inflation during his remarks.
Nor did the central bank chairman talk about declines in U.S. stocks, which had their worst week in four years, in his text.
However, Bernanke provided a subtle reminder the Fed is not without tools to influence markets if necessary.
"Empirical studies also find that U.S. monetary policy actions retain a powerful effect on domestic stock prices," he said.
Bernanke also told his audience the Fed agrees with studies that say government data overstates inflation data.
"I still think that there's still some overstatement, and Federal Reserve estimates are, depending on the indicator, somewhere between half a percent and a percentage point of overstatement of the inflation rate," he said in response to questions.
The Fed looks closely at the personal consumption expenditure price index to gauge inflation because it allows for the possibility that people purchase different goods as prices rise, he said.
The central bank chief said the Fed finds it difficult to pin down a fixed number for any natural rate of unemployment.
"There are a couple of problems that have emerged with using a fixed number like that for analyzing the macro-economy," he said.
The relationship between slack in the economy and lower inflation is "clearly lower" than it used to be, Bernanke said.
Fed Has Influence
Bernanke said that globalization has not "materially affected the ability" of the Fed to influence U.S. financial conditions, "nor has it led to significant changes in the process which determines the U.S. inflation rate."
Overall, globalization has probably spurred inflation in the United States rather than lowered it because recent increases in energy and commodity use in developing countries such as China and India have pushed up prices for such goods, Bernanke said.
He noted a study that found that if the share of world trade and economic growth of non-industrial countries remained at its 2000 level, oil prices would have been as much as 40 percent lower in 2005 and metals prices as much as 10 percent lower.
"Accordingly, in the past several years, the effect of growth in developing economies on commodity prices has been a source of upward pressure on inflation in the United States and other industrial economies," he said.
At the same time, increased trade with China and other developing countries has led to slower growth in the prices of imported manufactured goods, Bernanke said.
He cited a study concluding that trade with China alone reduced annual import price inflation in the United States by about 1 percentage point over 1993-2002.
The Fed is devoting more resources and time to trying to understand the effect of increased global integration on inflation and the central bank's ability to maintain price stability and ensure low unemployment, Bernanke said.
It is possible that trade promotes greater productivity and thus lowers costs, or that global demand influences domestic pricing decisions, but those effects remain to be conclusively shown, he added.