Federal Reserve Exports Inflation

“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.” – Federal Reserve Vice Chairman Donald Kohn

Yesterday’s sharp stock market drop was primarily due to the market’s delayed reaction to Wednesday’s FOMC statement which demonstrated the Fed is not concerned about maintaining price stability. Now the Fed is trying to prod emerging market countries that peg their currency to the dollar to decouple from the greenback. Pluto in Sagittarius (1995-2008) ushered in the era of globalization. Now that Pluto has retrograded from Capricorn back into Sagittarius until November 26, it’s not surprising that some reverse global engineering is being called for.

In a speech yesterday on “Global Economic Integration and Decoupling,” Vice Chairman Kohn indirectly acknowledged that the central bank is exporting inflation to dollar-pegged economies, which in turn is driving up the cost of global commodity prices. Kohn is saying that if these emerging economies decouple from the dollar, commodity prices will decline, which in turn would ease US inflation so the Fed can continue its accommodative policy of helping out the banks. Kohn continues to deny that US inflation has spread beyond food and energy to “core” when he states that “rising inflation has chiefly reflected the surge in energy prices, whereas in developing countries, for which food takes up more of household budgets, rising food costs have been a more important culprit.” That remark was followed by this gem: “The reasons for the trajectory and persistence of increases in prices of food and energy this year, as global growth has moderated, are not entirely clear.”

Many countries have pegged their currency to the dollar as a way to help maintain price stability. Continuous reiteration of our “strong dollar policy” by the Treasury Secretary and the Fed has amounted to nothing more than empty rhetoric. Kohn should be careful what he wishes for and consider the law of unintended consequences. If Saudi Arabia decided to de-peg its currency from the dollar, oil prices would skyrocket to unprecedented levels.

No comments: