Leaving aside the market's immediate reaction, Fed Chairman Bernanke's comments about the dollar are very revealing, not just for his thinking, but it likely reflected senior officials in the Obama Administration as well. In the last FOMC statement that the Fed highlighted three considerations behind its view that its Fed funds target can remain exceptionally low for an extended period of time: capacity utilization, price pressures and inflation expectations. In his speech Bernanke outlined the conditions under which the dollar's movement would become more salient for the conduct of monetary policy. The dollar becomes a more important policy consideration if the change of its value jeopardized the ability achieve the dual mandate of full employment and price stability.
It is this commitment to its dual mandate and to what Bernanke called "underlying strengths of the US economy" that will "help ensure that the dollar is strong and a source of global financial stability." In effect Bernanke is responding comments from some officials at weekend APEC meeting, including by a Chinese official that the Financial Times deemed worthy of a front page story, that the low US interest rates and weak dollar were financing a "huge carry trade" that was having a "massive impact on global asset prices." Bernanke essentially indicated that US monetary policy would be set according to the needs of the domestic economy (in terms of its dual mandate)--for what is good for Chicago, not Shanghai, for Detroit, not Kuala Lumpur, for L.A. not HK. This is not economic nationalism. It is simply to make the point that central bankers have to respond to domestic conditions.
Moreover, it seems very rich for countries and other regions that have purposely outsourced the conduct of their monetary policy to the Federal Reserve via unilateral currency pegs to argue that their interests ought to be taken into account. Isn't that the point ? Monetary policy that is arguably appropriate for the United States is not necessarily appropriate for China. If Hong Kong or China, for example, are experiencing distortions in the their asset markets perhaps it has something to do with domestic policy. The more than 50% rise in Hong Kong's money supply is not simply a function of a weak U.S. dollar, but is a reflection of HKMA's massive intervention. What is more responsible for the what ever excesses there may be in the China--its very aggressive monetary and fiscal policies or the "huge carry trade"
It is this commitment to its dual mandate and to what Bernanke called "underlying strengths of the US economy" that will "help ensure that the dollar is strong and a source of global financial stability." In effect Bernanke is responding comments from some officials at weekend APEC meeting, including by a Chinese official that the Financial Times deemed worthy of a front page story, that the low US interest rates and weak dollar were financing a "huge carry trade" that was having a "massive impact on global asset prices." Bernanke essentially indicated that US monetary policy would be set according to the needs of the domestic economy (in terms of its dual mandate)--for what is good for Chicago, not Shanghai, for Detroit, not Kuala Lumpur, for L.A. not HK. This is not economic nationalism. It is simply to make the point that central bankers have to respond to domestic conditions.
Moreover, it seems very rich for countries and other regions that have purposely outsourced the conduct of their monetary policy to the Federal Reserve via unilateral currency pegs to argue that their interests ought to be taken into account. Isn't that the point ? Monetary policy that is arguably appropriate for the United States is not necessarily appropriate for China. If Hong Kong or China, for example, are experiencing distortions in the their asset markets perhaps it has something to do with domestic policy. The more than 50% rise in Hong Kong's money supply is not simply a function of a weak U.S. dollar, but is a reflection of HKMA's massive intervention. What is more responsible for the what ever excesses there may be in the China--its very aggressive monetary and fiscal policies or the "huge carry trade"
Bernanke's Comments...What it All Means
![Bernanke's Comments...What it All Means]()
Reviewed by magonomics
on
November 17, 2009
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