Booming Commodity Prices and Inflation: Why the Fed Can't Solve These Problems

On CNBC last week, there was a good exchange between Charles Evans, who serves as President of the Federal Reserve Bank of Chicago, and the commentator Steve Liesman. The dialogue highlights just how quickly the commodity train has gotten off the tracks -- and at current levels, how the Fed and others are essentially powerless to reign in commodity inflation by raising interest rates (if that was even a goal of Fed policy, which it's not clear it is). During the exchange, Evans confirms that "It's certainly the case that oil prices are high ... [and] that's a headwind for the U.S. economy at these high prices." But it's not clear if the Fed has the power to impact commodity prices given the magnitude of the shifts we've seen in recent weeks, not to mention growing political, economic and military instability in key parts of the commodity-producing world.

Evans notes in this regard "that even if we were to tighten monetary policy...[it could] bring down commodity prices a percentage point, maybe two percentage points, but when you're worried about 15 percent or more in increases in commodity prices," such an impact would be negligible. Still, Evans acknowledges the broader linkage of monetary policy, commodity price pressure and the underlying elements driving volatility. Here he suggests, "developing countries, droughts in Russia, uncertainty in Mideast, a lot of other factors that swamp the effect of monetary policy."

At last week's Spend Matters International Trade Policy Breaking Point event (see coverage here), panelist Bill Strauss, senior economist and economic advisor in the economic research department at the Federal Reserve Bank of Chicago, suggested that inflation was not a major concern for the Fed at that point in time. Yet clearly for global manufactures -- and certainly domestic ones -- the current inflationary commodity price rollercoaster that we're on presents a giant challenge. But it appears that procurement and commodity management organizations will be on its own, as the Fed focuses on balancing inflation on one hand with an anemic economic recovery on the other (with at least one hand tied behind its back given the booming national debt and a questionable willingness of the Chinese and others to keep funding our national spending).

- Jason Busch