Fed's Mishkin Says Inflation Is Low Thanks to Policy

Tight central bank monetary policies and well-grounded expectations of low inflation are to thank for low inflation in recent years, not globalization, Federal Reserve Governor Frederic Mishkin said on Thursday.

"Inflation has come down in the old-fashioned way ... Tighter monetary policy and a commitment to price stability by central banks throughout the world have led to lower inflation and an anchoring of inflation expectations," Mishkin said at a conference on globalization hosted by the Fed.

Mishkin said that on balance, the net effect on U.S. inflation from cheaper manufactured imports and higher commodity prices has been small in either direction.

"Many of the exaggerated claims that globalization has been an important factor in lowering inflation in recent years just do not hold up," he said.

Discussing the effects of globalization on economic growth, Mishkin said global factors have the potential to be stabilizing for individual economies. Meanwhile, globalization has been a key factor in promoting economic growth, he said.

Globalization may have helped desensitize inflation to the gap between an economy's economic speed limit and its actual rate of growth -- known as the output gap, Mishkin said. Global factors may mean an economy is less likely to develop bottlenecks as domestic labor markets tighten, he said.

There is some evidence to suggest that foreign factors influence interest rates, Mishkin said. For example, a global savings excess has somewhat lowered long-term interest rates by reducing the risks associated with holding longer-dated debt, he said.

"However, central banks still retain the ability to control short-term interest rates, which affect the domestic cost of credit and long-term interest rates, and so can continue to do their job of stabilizing inflation and output," he said.

Mishkin said globalization may have increased the role of exchange rates as a factor affecting inflation and growth.

The larger the share of imports in the economy, the bigger would be the effect on growth of a change in net exports, he said. Also, the more a country imports, the greater the effect on inflation from a change in import prices resulting from a move in exchange rates.

As the value of the U.S. dollar changes, Europe's economy will have to adapt with shifts from one sector to another, Mishkin said.

"Exchange rates move for reasons we don't always understand and can have an effect on the economy," he said in response to questions after a speech on globalization.

"You want to have an economy that's pretty flexible, that can move resources from one sector," he added.

The U.S. economy has been flexible in response to foreign exchange fluctuations, and the European economy is faced with a similar need for adaptability, he said.

Increased integration of global markets could change the way an economy works and complicate the jobs of monetary policy makers, Mishkin said.

"In practice, however, the behavior of the U.S. and global economies does not appear to have radically changed in recent years," he said. "The Federal Reserve and other central banks retain the ability to stabilize prices and output."