Yesterday at the National Press Club, Fed Chairman Ben Bernanke delivered a lengthy sermon justifying his grand strategy for the US economic recovery. In his discourse, the Chairman made it abundantly clear that, in his view, it was unfair to label Fed monetary policy as the cause of global increases in commodities prices, an issue some market pundits have speculated as of late.
Attacks on the Fed have been quite peculiar–some have even gone so far as to suggest US monetary policy played a role in the government collapse of Egypt. Three decades of oppression would seem a more likely explanation. But Bernanke’s statement was also peculiar:
It’s entirely unfair to attribute excess demand issues in emerging markets to US monetary policy.
“Entirely unfair?” One would expect the Chairman to say to his critics that it is ‘entirely inaccurate’ or ‘misleading’. But it does not seem entirely unfair to, at a minimum, examine a linkage between record high commodity prices and the Fed’s controversial, and highly unconventional, monetary policy. This early in the game, it simply cannot be ruled out as a contributing factor. Then again, that is the very problem- it’s too early in the game.
To provide a sensible explanation for his critics, Bernanke puts in plain words how the role of supply and demand accounts for price increases:
On the inflation front, we have recently seen significant increases in some highly visible prices, notably for gasoline. Indeed, prices of many commodities have risen lately, largely as a result of the very strong demand from fast-growing emerging market economies, coupled, in some cases, with constraints on supply.
During the question and answer period, Bernanke was keener on separating the Fed’s liability:
There’s a lot going on there …When you talk about food prices… you talk about supply and demand …The fed monetary policy is aimed at the US economy….We are using policy to address stability in the United States.
Let us use the crisis in Egypt as a way of applying his methodology. While under political turmoil, Egypt is also the world’s largest importer of wheat. Yesterday wheat prices surged on the Minneapolis Grain Exchange to levels past $10 a bushel, as demand in Egypt is likely to increase partly based on the following speculation: political disorder will interrupt routine commercial activity, thus more wheat will be needed to supply Egyptian natives.
Additionally, traders would likely add a premium to the selling price knowing the largest wheat importer (and end-user) is under distress and would likely stock up for political or security reasons. This increase in demand justifiably increases the selling price at grain exchanges. At the same time, there have been well-explained disruptions to normal supply channels, further creating upward price pressures on grain.
If we were to take a look at oil, we’d notice a similar but different scenario. While not an oil producing country, about 2.5 percent of global oil production moves through Egypt via the Suez Canal. As crisis in Egypt ensued, oil futures in New York rose 3.2 percent based on the idea that a political coup could cause a supply disruption. If a new government were to halt canal operations, there would be a shortage of oil in the world market. This decrease in supply would cause a spike in oil price–there’s less to go around. And, of course, there’s the risk that the political turmoil that began in Tunisia could spread past Egypt to other major oil producing countries in the region.
In both the case of wheat and oil, we’ve demonstrated a causality that even Hume would appreciate. Yet while these are just two particular economic phenomena, those that criticize Bernanke claim that the current US monetary policy is another phenomenon that is affecting pricing of food on a grander scale. Out of what little is known so far, declaring the dollar as the staple currency for international trade is a moot point. That is of no relevance. More importantly, while the Fed’s monetary policy has been highly accommodative, it is not the central bank to the world. Others, including the European Central Bank, the Bank of England, and so on have been similarly accommodative. And then there’s China… Taken together it is unrealistic to assert a logical causation between the Fed’s policies, or even those of the central banks collectively, with record commodities prices, albeit any international inflationary risk.
What we can gather, in spite of it all, is that there are two camps in this debate. And while critics may be inaccurate in asserting or even supporting their shortsighted claim, it does seem entirely appropriate to question the causality- something Bernanke, as demonstrated, is chiefly against.
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