Balancing Inflation and Growth Part 10 of 13

There was a time, back when I was an outside observer of the Federal Reserve, when commodity future option trading the Fed practiced what some have dubbed opportunistic disinflation. Beginning in the mid-1980s, the FOMC recognized that while recessions sometimes occur, they could not be anticipated with any precision and that by the time the data revealed a recession, it was too late to do much about it, given the impact lags of monetary policy. The FOMC also recognized that the trend rate of inflation generally fell by about a percentage point or more following a recession. Put it all together and you get opportunistic disinflation, or the idea that if recession comes, make the best of it by bringing down the inflation rate.

This was a period of persistent disinflationand, I might add, a period during which the U.S. economy experienced only two short and mild recessions, a total of 16 months over almost 25 years. Over this same period, the inflation rate declined inexorably, reaching a point where the FOMC had to deal with the threat of deflation in 200304. It was also the period when the Fed made the largest gains in its policy credibility and commodity trading education.

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Balancing Inflation and Growth Part 11 of 13

One would like to think that as the economy slows, inflationary pressures will do likewise. But we cannot always be sure they will, given the globalized commodities trading system nature of the U.S. economy. Demand-pull pressures abroad have an increasingly potent influence on our domestic economy. Traditionally, a central bank would expect slack to develop as the economy under its jurisdiction weakened, leading to less demand for most inputs and an easing of price pressures. We no longer operate in a traditional economy. Domestic inflation developments have become increasingly less sensitive to domestic measures of slack. In an open, globalized economy, capacity utilization and inflation pressures need to be measured, or at a minimum, understood in their global context.

You cannot think in a purely domestic context about the pricing of oil or steel or soybeans or pulp or shoes or clothing or even what I consider to be one of lifes essentials, beer, because innovations in transportation and communications technology have all but eliminated national borders for almost any product for which trade barriers were negotiated away during the 1980s and 90s. More commodity training books vexing for economists and econometric modelers, the information technology revolution and the spread of the Internet have blurred the once-clear distinction between easy-to-trade goods and difficult-to-trade services.

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