Fed must pay ‘greater attention’ to global forces

The Financial Times
Increasing integration of financial markets means the Federal Reserve has to pay much greater attention to global forces when setting monetary policy, Ben Bernanke said late on Friday.

The Federal Reserve chairman focused on long-range issues, and did not refer to recent market turmoil or make any comments on the state of the US economy.

Mr Bernanke said international factors, such as the so-called “global savings glut” played an increasingly prominent role in determining long-term interest rates in the US, and helped explain why rates have remained low in recent years.

To understand and evaluate conditions in the bond market, he said, “the Fed must take into account the various effects of foreign capital flows on US yields and asset prices, a task that can be quite challenging.”

But Mr Bernanke insisted the Federal Reserve has not lost control of the key levers it needs to shape monetary conditions in the US economy.

He said the Fed still has direct control over short-term interest rates, and retains considerable influence over long-term rates as well through its ability to shape expectations of where short term rates will be in the future.

Indeed, Mr Bernanke said empirical evidence suggests US monetary policy has greater influence on monetary conditions abroad than the other way around.

The Fed chairman also discussed the relationship between globalisation and inflation, concluding that while global factors “do seem to influence inflation” the net effect in recent years was not obviously to reduce the rate of price increases.

“When the offsetting effects of globalisation on the prices of manufactured imports and on energy and commodity prices are considered together there seems to be little basis for concluding that globalisation overall has significantly reduced inflation in the US in recent years,” he said.

“Indeed the opposite may be true.”

Mr Bernanke said the idea that US inflation was influenced by the global balance of supply and demand, as well as the domestic balance, was “intriguing” but that the evidence so far was “inconclusive.”