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.”

Bernanke Trying To Fill Greenspan's Shoes

How Did Federal Reserve Chairman Ben Bernanke Do During Wall Street Scare?

cbs
When Wall Street went on a wild ride this week and stocks started to plummet, with just a few words, Federal Reserve Chairman Ben Bernanke was able to calm our fears.

“There is really no material change in our expectations for the U.S. economy," he said.

Tapped by President Bush to take over as fed chairman just over a year ago, Bernanke succeeded a man who spent 18 years on the job.

"Ben will replace a legend, Alan Greenspan,” said President Bush back when he appointed Bernanke. "He has dominated his age like no central banker in history."

And despite Bernanke's credentials as a Princeton professor and Fed Governor, many business leaders were concerned about the transition.

"No one is irreplaceable,” said Jack Welch, former CEO of General Electric, back in January of 2006. “But Alan Greenspan will leave a big hole that this guy will have to work like hell to fill."

Ironically, it was Greenspan's own words this week that helped add fuel to the market's fire, when he warned that the U.S. economy could be headed toward a recession.

"Greenspan is worth reporting, even if he wasn't the former Fed chairman he'd be worth reporting because he's very smart and understands the economy," says Irwin Stelzer, director of economic policy studies at the Hudson Institute.

Quietly, Bernanke has tried to put his own imprint on the economy and the Federal Reserve. But his tenure got off to a shaky start when he made an off-hand remark about interest rates, which sent stocks plummeting.

"So he made a few gaffes but basically he is a very smart guy," says Stelzer.

And Wall Street generally gives him high marks for keeping the economy on track even as it slows down. There are still challenges ahead. New home sales fell more than 16 percent in January, the steepest monthly drop in 13 years.

“I think we'll look back in history ... at an environment where Bernanke probably became as important and as noted as Alan Greenspan,” says Liz Ann Sonders, chief investment strategist, at Charles Schwab.

If Bernanke is able to manage the slowdown he'll begin to move out of Greenspan's shadow.