Don't blame the Fed for $100 oil.
That's Ben Bernanke's message at the International Monetary Conference in Atlanta Tuesday. Bernanke said little about the outlook for Fed policy, other than to say he'll need to see "a sustained period of stronger job creation" to believe the economic recovery is fully under way. Join the crowd on that one.
So, surprise surprise, the Federal Reserve will be keeping interest rates low and its balance sheet big for the foreseeble future. But that wasn't Bernanke's main message.
Instead, the Fed chief pushed back against the critics of loose Fed policy, who blame the central bank for reducing the value of the dollar and fueling a big rise earlier this year in the prices of oil and other commodities.
They do so wrongheadedly, he said. While demand for oil has surged thanks to global growth, supply remains below 2008 levels.
"With the demand for oil rising rapidly and the supply of crude stagnant, increases in oil prices are hardly a puzzle," Bernanke said.
What's more, Bernanke noted that while the trade-weighted dollar has lost 15% of its value since markets bottomed out in early 2009, the oil price has surged 160% and the price of a basket of nonpetroleum commodities has surged 80%.
This suggests "that the dollar’s decline can explain, at most, only a small part of the rise in oil and other commodity prices; indeed, commodity prices have risen dramatically when measured in terms of any of the world’s major currencies, not just the dollar," Bernanke said.
Last but not least, he notes that monetary policy plays only a small role in determining currency values, which over the long haul are more apt to reflect the strength of the economy (not so hot lately) and a country's trade position (not so hot in a long, long time).
Slow growth in the United States and a persistent trade deficit are additional, more fundamental sources of recent declines in the dollar’s value; in particular, as the United States is a major oil importer, any geopolitical or other shock that increases the global price of oil will worsen our trade balance and economic outlook, which tends to depress the dollar.
In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around. The best way for the Federal Reserve to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability, and we will certainly do that.
Bernanke's reasoning is sound, of course. The Fed's really troubling mistakes came long ago, when Bernanke and his predecessor Alan Greenspan allowed the party to go on years too long, culminating in that thing where the banks got rich and blew up the universe.
No one said digging out of that hole was going to be fun, and it isn't -- not for Bernanke and not for the 14 million Americans who can't get jobs thanks to years of ill-advised policy and passing the buck. But blaming Bernanke for things he can't control isn't going to make it any easier.