When the Federal Reserve unveiled a controversial program to buy Treasury bonds last summer, in a new bid to boost the US economy, critics warned that it could unleash inflationary pressures. Since then, global prices for basic commodities have soared, with one measure of global food prices now at a record high.
So, is the Fed to blame?
On Thursday, Fed Chairman Ben Bernanke pushed back against that idea.
The Fed chief's comments at the National Press Club in Washington came on the heels of an announcement from the United Nations that global food prices rose for the seventh straight month in January. The UN's food-price index now stands at its highest level in its 21-year history. Oil prices, meanwhile, have jumped above $90 per barrel in recent days.
One questioner focused on the Fed's possible role in driving food prices and whether those rising prices have fueled social unrest in the Middle East.
Bernanke said that factors other than food prices may be playing a role in the protests in Egypt and elsewhere, and that global food prices are rising mainly because of trends in emerging markets.
"We have essentially a two-speed recovery" in the global economy, Bernanke said. The US and other advanced economies are recovering from recession slowly, while nations such as China and Brazil are growing faster.
Those emerging economies, and the richer diets that go along with rising prosperity, are driving the rise in food prices, Bernanke said. He called it "entirely unfair" to blame the Fed's loose monetary policy, including the recent program of Fed bond purchases known as QE2.
Since word about these bond purchases began circulating last August, global asset prices have surged – ordinary stock indexes as well as commodities like food products and oil. To critics, it's a sign that the Fed's monetary easing is sending inflationary shock waves worldwide, even as it fails to bring down high unemployment in the US.
Bernanke challenged those claims on two fronts.
First, he said the Fed's rightful role is to focus first on conditions in the US, while monitoring how evolving global conditions might affect that policy.
"The Fed's policy... is aimed at stabilizing the United States economy," he said. "It really is up to the emerging markets to find the appropriate tools to balance their own growth."
He said central banks in other nations can adjust their monetary and exchange-rate policies to curb inflation. He and other economists note that – even if inflationary pressures are tamed – prices of any given items, including food and oil, will change due to the particulars of supply and demand.
Second, Bernanke rejected the view that the Fed's policies lack traction in the US. He conceded that a recovery in jobs is "not going to be as fast as we would like," but that job creation should begin to reduce the unemployment rate "pretty soon."
Although the Fed's bond-purchase policy is unconventional – when compared to the more traditional monetary policy of adjusting short-term interest rates – Bernanke said it works in much the same way as other forms of easing monetary policy. In the past six months, for example, stock prices have risen and become less volatile. And although interest rates on Treasury bonds have risen a bit, Bernanke attributed that partly to growing optimism about the economy.
The goal of those changes in financial conditions, Bernanke pointed out, is to boost economic growth and job creation.
Is the Fed is too secretive and powerful? some asked.
The central bank is becoming increasingly transparent in explaining its policies, Bernanke said, adding that a Fed committee is considering regular press conferences for the Fed chairman.
Such audits would go beyond the reporting of financial transactions to reviewing policy decisions, Bernanke challenged, adding that those decisions "should be up to the Fed," independently. Citing track records of central banks in other nations, he said that "if the Fed becomes essentially an arm of Congress, ... that would lead to much worse outcomes in terms of inflation" and economic stability.