The Federal Reserve Bank of Kansas City’s annual monetary policy conference in Jackson Hole, Wyoming, couldn’t come at a better time for Fed officials.
For months, US monetary policy - now on pause after two years of steady tightening - has been largely dependent on economic data, leaving officials and investors alike captive to the twists and turns of numbers, whether it’s underlying consumer price figures rising 0.2% or 0.3% or the jobless rate ticking up a notch or two.
But data-dependent officials got a chance last week to work their intellectual muscles with perhaps the biggest of big picture topics: globalization and its effect on the economy and monetary policy.
The two-day event kicked off Aug. 25 with a speech by Fed Chairman Ben Bernanke, and includes papers and remarks from academics and central bank officials from around the world.
While globalization may not have much of an impact on the next consumer price or employment report, its effects on the US economy have been felt for years, and will be felt for years to come, through international trade and wages as well as energy and commodity prices, economists said.
“What’s going on with business cycles around the world is very important for US inflationary forecasts,” said Lakshman Achuthan, director of the Economic Cycle Research Institute.
Expansionary global monetary policies following the 2001 US recession “produced the strongest wave of global economic growth in forty years,” said analysts at Bridgewater Associates in a research note.
“This growth has pushed commodities prices substantially higher because the supply of commodities is constrained. But it has not pushed wage rates substantially higher because the supply of labor has expanded,” they said.
Given those dis-inflationary labor and inflationary commodity crosscurrents, “it’s a tougher environment for a central banker,” Achuthan said.
Contrasting views at Fed
Recent remarks by Fed officials suggest the topic of globalization is clearly on their radar screen, though it seems to have contrasting implications for US inflation.
One school of thought is that increased integration of the world economy and the industrialization of developing countries like China and India have contained inflation in the US by providing low-cost labor. That means the US can operate at higher rates of capacity utilization and lower unemployment rates than previously thought without triggering price pressures.
In an April speech, Dallas Fed President Richard Fisher said “the Fed has been able to contain inflation with faster growth than would have been possible in the absence of globalization.”
“The secular impact of enormous new capacity and factor inputs from China, India and the other new economic entrants - transmitted through globalization - has offset the price pressures on commodities and other goods that have been spurred by growing demand in those countries, as well as normal cyclical price developments,” he said.
In a June speech, Fed Vice Chairman Donald Kohn downplayed the effects of globalization on inflation, saying “the effects of globalization on domestic inflation need not even be negative, especially in today’s environment of strong global growth.”
Import prices, Kohn noted, have in recent years risen at about the same average pace as core prices, “and thus no longer appear to be acting as a significant restraint on inflation in the United States.”
“I would say so far Fisher’s got the upper hand,” with the notion of globalization as a broadly disinflationary force, said John Silvia, an economist at Wachovia.
“In the very short run you’ve added global capacity to produce goods,” he said, which “at the margin has created more capacity to produce goods at a low price and hold down US inflation.”
“I would probably say the (disinflationary) impact is still on for another five or 10 years,” said Silvia.
Overseas Rate Hikes Could Help Fed
A more immediate instance in which globalization may help the Fed in its effort to a