U.S. Federal Reserve Chairman Ben Bernanke is scheduled to testify before the Senate Banking Committee today, and this report gives a helpful glimpse at the difficulties he faces.
We learned in the 1970’s, when OPEC first managed to raise oil prices, about the double-edged sword of stagflation. Oil has become such a strong supply side influence that it can cause both inflation and slow economic growth.
Bernanke wants to maintain the Fed’s 600 million stimulus package to battle low growth rates and unemployment that is still around 9% in the U.S. The problem is that many Americans–and many in Congress–are afraid of inflation and the large public debt in the states.
It is a dilemma, but with inflation at only 0.8% over the last year, I agree that Bernanke is emphasizing the correct problem, despite higher oil prices. The time to fight inflation and deficits is when we see strong growth.
On the other hand, perhaps the American economy has reached income levels where more growth should not be emphasized.
This story–China’s growth accelerates to 10.7 percent in 4Q–creates some curious reactions in world markets. Asian stock indexes went down, and the US dollar rose to a five-year high. The funny part is that the good news also brought renewed expectations that China would raise interest rates and tighten money supply growth. Inflation is feared, apparantly more than a reduction in the rate of growth.
Strong Chinese growth could help to drive a global recovery by boosting demand for foreign oil, consumer goods and other imports. It also might give Beijing confidence to ease currency controls and allow its yuan to rise against the dollar, which could boost imports by making them cheaper for its consumers. China has kept the yuan steady against the dollar since late 2008 to keep its exporters competitive abroad.
But that progress could be derailed if a burst of inflation saps the spending power of Chinese families and forces the government to clamp down so severely on credit and investment that it slows the creation of new jobs.
So the expected increase in interest rates explains the lower spending expectations in the rest of Asia, but that would normally make the currency stronger against the dollar. Must be that the “confidence to ease currency controls,” is seen as a stronger influence.
Myself? I doubt it. For years China has been able to keep the Yuan relatively low through currency purchases, and still manage inflation domestically. Like mentioned later in the article, most of China is still a developing country.
(Don’t forget to visit alphainventions.com)
George Selgin wrote an interesting piece called End the Fed? A not-so-crazy idea. It does sound a little bonkers to me. Selgin thinks it might be a good idea to return to a totally privatized banking system, and he gives some historical data to back-up the argument. Still, his examples come from over fifty years ago when–really–people knew less about how money and a national economy are interdependent. Of course the Fed has made mistakes, but I would argue that–as time goes by–US Central Bankers are better and better prepared to do their job well.
Even more frightening, and a more realistic possibility, is that Congress will succeed in taking some control over Fed policy. That would be a disaster. One easy argument–compare congressional policy over the last fifty years with Fed policy. The Fed’s independence has allowed them–mostly–to follow money policy that encourages growth and discourages inflation. To put them under the control of Congress puts them under the control of big business.