Fed

Inflation Is Largely a Global Phenomenon

When economic journalists speculate about looming inflation risks in the U.S. or any other country, they implicitly assume that each country’s inflation depends on that country’s fiscal or monetary policies, and perhaps the unemployment rate. Yet The Economist for March 3rd–9th shows approximately 1–2 percent inflation in the consumer prices index (CPI) for virtually all major economies. 

Inflation rates were surprisingly similar regardless of whether countries had budget deficits larger than ours (Japan and China) or big surpluses (Norway and Hong Kong), regardless of whether central banks experimented with “quantitative easing” or not, and regardless of whether a country’s unemployment rate was 16.9 percent (Spain) or 1.3 percent (Thailand). 

The latest year-to-year rise in the CPI was below 1 percent in Japan and Switzerland, 1.5 percent in Hong Kong and the Euro area, 1.6 percent in Canada and China, 1.8 percent in Sweden, 1.9 percent in Norway and Australia, 2 percent in South Koreas and 2.1 percent in the U.S.  Among major countries, U.K. was on high side with inflation of 2.7 percent.  Three economies with super-fast economic growth above 6 percent (India, Malaysia and the Philippines) do have slightly higher inflation—above 3 percent—but the CPI is up just 1.6 percent in one of them, namely China. 

Major Country Inflation

The remarkable similarity of CPI inflation rates is surprising since countries measure inflation differently and consume different mixes of goods and services. The fact that inflation rates are nonetheless so similar, and move up and down together, suggests that inflation is largely a global phenomenon.  The U.S. may well have a disproportionate influence on global inflation, since it accounts for about 24 percent of global GDP and key commodities are priced in U.S. dollars.  Yet U.S. inflation nonetheless goes up and down in synch with other major economies, as the graph shows. 

On the Great Inflation Canard

Charles W. Calomiris and Peter Ireland, two distinguished economists and friends, wrote an edifying piece in The Wall Street Journal on 19 February 2015. That said, their article contains a great inflation canard.

They write that “Fed officials should remind markets that monetary policy takes time to work its way through the economy—what Milton Friedman famously referred to as “long and variable lags”—and on inflation.” That’s now a canard.

Audit the Fed: What Would Milton Friedman Say?

Senator Rand Paul (R-KY) introduced a bill (S.264) which is popularly known as “Audit the Fed” (ATF). The bill picked up 30 initial co-sponsors. Although the Fed is already extensively audited in the accounting sense of the term, the ATF bill would expand the scope and scale of Fed auditing. Indeed, monetary policy decisions, which have been exempt from any sort of “auditing” since 1978, would see their auditing exemption lifted if the bill becomes law.

Some Preliminary Thoughts on the New “Final” Volcker Rule

There was only one way that the five regulatory agencies tasked with drafting the Volcker Rule–the provision of Dodd-Frank limiting proprietary trading by banks–were ever going to meet the year-end deadline and give meat to a poorly drafted statutory provision. That was if they retained maximum ex post facto discretion to decide whether bank activity is permissible or not under the rule. Unsurprisingly, this appears to be exactly what they have done.

I have some particular concerns:

Yellen and the Fed

The Senate Banking Committee just voted 14 to 8 to confirm Janet Yellen’s nomination to be the new Chair of the Federal Reserve. She will likely go on to be confirmed by the full Senate.

Much of the coverage has focused on Yellen as a person, when the real story is on the Fed as an institution. Sometimes individuals have profound influence on Fed policy, such as Paul Volcker  in the late 1970s and 1980s. Over time, however, the institutional structure of the central bank and the incentives facing policymakers matter more.

The Ben Bernanke Variety Hour

April 27th begins a new chapter in Federal Reserve history: the Fed joins other major central banks in having a press conference after its monetary policy meetings (the Federal Open Market Committee).  Apparently the record lows in public support for the Fed, along with rising gas and food prices, have driven Bernanke to attempt to change the narrative.  After all, his appearance on “60 Minutes” did wonders for the F

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