Fed Governor Gramlich: Low Inflation Helps to Fight Unemployment

Federal Reserve Governor Edward Gramlich, who is leaving the Fed at the end of this month, compares Fed reaction today in the face of rising oil prices to the events of the 1970s and claims that low inflation may be a key to fighting unemployment effectively:

Gramlich Says Fed Keeps Oil From Stoking Inflation, Bloomberg:  The Federal Reserve's commitment to fight inflation may be keeping soaring oil prices from triggering a broader increase in consumer prices, Fed Governor Edward M. Gramlich said in an interview. ''It is a wondrous event for those of us who were here in the `70s,'' when oil prices caused inflation to surge, Gramlich said yesterday from his office in Washington.

The Fed's efforts may have ''worked in keeping inflation at bay when oil or gas prices have gone up so much.'' Gramlich, 66, is leaving the Fed on Aug. 31 after almost eight years to return to teaching at the University of Michigan. … Gramlich said he overestimated the potential for soaring oil prices to stoke inflation. … Lower labor costs overseas should help the U.S. to continue growing without accelerating inflation, Gramlich said yesterday. … The former dean and college professor, known as ''Ned,'' will be the second Fed governor to leave this year, clearing the way for George W. Bush to become the first president since Ronald Reagan to have either appointed or reappointed all seven central bank board members. ... Gramlich is resigning with more than two years left in his Fed term.  … ''On the fundamentals of monetary policy, there is quite a broad consensus on the Open Market Committee,'' Gramlich said. ''It's important to keep inflation low, to keep prices stable. If you do that, you probably have more freedom, not less freedom, to fight unemployment.''  … ''I am pretty proud of monetary policy,'' he said. ''It's possible that even if there are new people at the table, you wouldn't see much change in policy.''

As monetary policy and inflation targeting are the topic here, this gives me an opportunity to direct you to a post at New Economist on Taylor Rules with discussion and links to papers concerning some of the limitations of using Taylor rules to guide monetary policy.

Comments

[anne]

This is an important article for a further sense of Federal Reserve thinking, and a comparison that the Fed is making with 1980 and I think justified. Brad DeLong reminds us in coming days there will be a discussion of American productivity which will possibly further give us a sense of where monetary policy will go. Is productivity growth as robust as I have thought, or are we slowing to levels from 1975 to 1995? Was the last decade a prelude in productivity?

[anne]

http://www.nytimes.com/2005/08/18/business/worldbusiness/18yuan.html

Fuel Shortages Put Pressure on Price Controls in China
By KEITH BRADSHER

HONG KONG - Sudden shortages of gasoline and diesel in Southeastern China are reigniting a debate here: Is pressure from state companies, coupled with freely available information on oil prices, driving China to accept market forces faster than it may have wanted?

Dozens of service stations in Southeastern China, notably in cities near Hong Kong, abruptly ran out of fuel this week just as officials in Beijing were debating requests from domestic oil companies to charge more for diesel and gasoline. The shortages have produced long lines of angry motorists at service stations and have disrupted some freight shipments, as trucks do not have the diesel to make trips.

Some in China and abroad say the state oil companies created the shortages to increase prices. China regulates retail fuel prices, adjusting them no more than once a month. But the government has not raised them nearly as quickly as world oil prices have risen, hoping to keep inflation in check. This has left refiners with negligible profit margins, and even losses, as they convert oil into gasoline and diesel....

[anne]

http://www.nytimes.com/2005/04/19/business/worldbusiness/19energy.html?ex=1124942400&en=7d3c17ed58675f16&ei=5070&emc=eta1

The Great Engine of China Is Low on Fuel
By KEITH BRADSHER

The original article on Chinese fuel price controls....

[anne]

http://delong.typepad.com/sdj/2005/08/gross_domestic_.html#comments

Gross Domestic Product and Gross Domestic Income
Everyone should read Daniel Gross's "Economic View" column this forthcoming Sunday: he's trying to make sense of the fact that estimates of National Product show productivity growth reverting to its average post-1995 pace, while estimates of National Income continue to show more rapid productivity growth. It's an important topic, and it's bound to be a good column....

[anne]

http://www.nytimes.com/2005/08/08/business/08fed.html?ex=1281153600&en=50ea97eaa01ab06b&ei=5090&partner=rssuserland&emc=rss

August 8, 2005

Productivity Is the Issue of the Hour for the Fed
By EDMUND L. ANDREWS

Here is a prelude to the productivity discussion in Business Week, and carried along by Brad Delong and Daniel Gross....

[Movie Guy]

I have yet to read a comprehensive analysis of the effects and noneffects of rising crude oil prices on the U.S. economy. Yes, I have read stories and brief reports here and there that offer a few clues, but I haven't found the detailed study.

Ned Gramlich touched on one issue of interest.

"Lower labor costs overseas should help the U.S. to continue growing without accelerating inflation, Gramlich said yesterday."

If lower overseas production costs are reinforced with artifically low energy pricing supporting such production, then such export pricing could be held down. Sure, the U.S. consumers benefit in the short term, but the current account deficit continues to grow while U.S. exports lag U.S. imports.

But, more than that, Gramlich's remark credits the trend regarding outsourcing and general foreign imports. The Fed, along with Treasury and other elements of the Administration, are endorsing the outsourcing initiatives and foreign-sourcing of finished goods. This, in turn, appears to reinforce the general thinking that services can readily assume the declining role of manufacturing and similar production means as the primary driver of the economy.

So, the government may still believe that a service economy is an effective substitute for improving U.S. standards of living. And that's just not proving to be a valid argument.

Look to the other principal driver. Strip away the ongoing housing construction, and where are we?

I expect that our most recent 'positive' experience with crude oil price increases will result in additional policy and practice recommendations to outsource more production of goods.

I don't believe that this approach will help us turn the corner on our current account deficit or help our economy in the long run, but it may mask the effects of crude oil price increases.

[New Economist]

Mark, thanks for the link. More such pieces to come, I promise.