The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.
NEW YORK (
) -- Ben Bernanke today will discuss with reporters decisions taken by the
Federal Reserve Open Market Committee
. For this unprecedented press conference to be successful, Bernanke must venture where Fed chairmen are most reluctant to go -- into politics.
Economists have long held that transparency about goals and means makes monetary policy more effective. However, genuine transparency requires that Bernanke acknowledge the limits imposed on the Fed policy by the actions of Congress, the administration and foreign governments.
Federal Reserve Chairman Ben Bernanke
Inflation is heating up, thanks to rising oil, food and other commodity prices. Many in Congress and financial markets blame quantitative easing -- QE2 -- the Fed's policy of purchasing Treasury securities to moderate interest rates on mortgages, corporate bonds and the like -- but easy money is not causing inflation.
China and several other Asian governments choose to keep their currencies substantially undervalued against the dollar and regulate domestic gasoline and other commodity prices. Those policies boost Asian exports and growth, slow U.S. and European growth, and push up global prices for oil and other commodities.
Growth in developing countries is inordinately energy- and commodity-intensive, as greater prosperity translates into more cars, apartments and commercial buildings, roads and richer diets -- more meat and milk that require grains to produce. All that pushes up global prices for the oil, building materials and food those economies must import in massive quantities to grow quickly.
Moreover, those governments must print and trade huge amounts of their currencies for dollars with U.S. and EU importers to keep their currencies from rising in value against the dollar in foreign exchange markets. That gives those governments piles of greenbacks to subsidize oil imports, keep domestic prices for gas and diesel from rising too quickly, and shift the burden of tighter global oil supplies on to the U.S., Europe and poorer developing countries.
In the U.S., the immediate result is soaring gas and food prices, even as unemployment remains uncomfortably high and wages hardly keep pace with inflation.
The Fed can do little about the actions of foreign governments to control that inflation, but the U.S. isn't helpless. Economists on the right, the left and in the center have articulated policies the Treasury could pursue, in addition to G20 diplomacy, to neutralize Beijing's and other governments' currency manipulation. President Obama has acknowledged the potential effectiveness of those options but nixed their use.
Bernanke has articulated the connection between Beijing's exchange rate policy and slower U.S. growth, and he well understands the direct connection between China's currency policies and protectionism, on the one hand, and U.S. oil and food inflation, on the other.
Bernanke would do his cause, and the nation's understanding of the choices he faces, a lot of good if he would articulate the connection between China's currency manipulation and rising gas and food prices, the limits of Fed power to manage inflation, and the options available to the Treasury to accomplish solutions. However, he won't embarrass a Treasury secretary and president too timid to act, and will continue to carry the pail for the administration's inaction.
Year-over-year, energy prices are up 16% -- gasoline, 28% -- and food prices have increased 3%, while inflation on other items is barely more than 1%. Considering the latter include health care and college tuition, where government policies drive prices ever higher, inflation in the free-market private sector is no more than 1% a year.
Easy monetary policy causes inflation when the economy is near full employment --then too much money chases too few goods. But with 8.8% unemployment, wages are hardly moving, and productivity growth has permitted firms to absorb much of the cost of higher energy and other commodity prices.
Simply, low interest rates and QE2 are not driving inflation. If members of Congress, like Rep. Ron Paul (R-Texas), want inflation fixed, they should address currency and trade problems with China. However, they are reluctant to seize exchange rate policy from the Treasury and president. Instead, they score points and troll for votes by trashing the Fed, and will continue to do so, until Bernanke pushes back.
This is the core of Bernanke's challenge. The Fed is supposed to be non-political. But if he is to explain monetary policy to the public -- its purposes and limits -- and create the transparency economists believe improves Fed effectiveness, he must be political.
On the blackboards of graduate seminars, economics is physics -- energy, actions and reactions -- but in Washington, it's nothing more or less than raw politics.
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Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.