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—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 U.S. 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 quickly.
Moreover, those governments must print and trade huge amounts of their currencies for dollars with U.S. 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 countries.
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 inflation.
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 G20 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.