E-MAIL THIS LINK
To: 

Fed may call for end to dollar peg for commodities
Countries with overheating economies are contributing to inflation around the world by pushing up commodity prices, Don Kohn, the vice-chairman of the Federal Reserve, said on Thursday. His comments came in a speech in which he appeared to call on fast-growing emerging markets to drop their exchange rate pegs to the dollar and adopt independent monetary policies – so they no longer import Fed monetary policy.

Mr Kohn said “in those countries where strong commodity demands are associated with rapid growth in aggregate demand that outstrips potential supply, actions to contain inflation by restraining aggregate demand would contribute to global price stability”. The Fed vice-chairman did not specify what steps he thought should be taken to restrain demand in these overheating countries.

However, he said economies “benefit from having independent monetary policies that provide room to respond flexibly” to different economic shocks. He added “these benefits could be increased if exchange rate flexibility were to become more widespread”.
Meanwhile the Euros and Brits blame it all on the Fed.
These remarks reflect Fed frustration at the way in which fixed exchange rate regimes transmit low interest rates meant to address US economic weakness to rapidly growing emerging economies – fuelling demand for commodities.

The Fed has never named any such regimes, although many economists point to rapidly growing economies in Asia, notably China, and some to the Middle East.

Mr Kohn’s speech suggests that the Fed believes that the global economic system would function better if these emerging economies had a greater degree of monetary independence, allowing them to set the interest rates appropriate for their own economies.

The reference to “global price stability” is striking because Mr Kohn has long championed the traditional view that inflation is still determined in separate monetary areas. While there is nothing to suggest that the Fed vice-chairman has abandoned this view, his speech highlights the potential for spillovers via commodity prices from countries within in effect the same monetary area and from countries in other monetary areas.

The Fed is thinking about whether the transmission of foreign overheating through commodity prices means that it needs to pay increased attention to measures of global capacity use. Traditionally a central bank focuses on domestic capacity utilisation – the balance between supply and demand in the economy – as a key determinant of inflation.
Posted by: lotp 2008-06-27
http://www.rantburg.com/poparticle.php?ID=242734