Dudley: Don't blame Fed for recent price hikes

NEW YORK (CNNMoney) -- The Federal Reserve is not to blame for the rise in global commodity prices and it should continue its controversial purchases of Treasuries, according to New York Fed President William Dudley.

Speaking at New York University on Monday morning, Dudley challenged the assumptions that the recent rise in oil, food and other commodity prices is the fault of the Fed -- which has been pouring money into the economy with its recent purchases -- or that there is a risk of a U.S. inflation outbreak.

• Email
• Print

New York Fed President William Dudley

He argued the U.S. economy is still too weak to have higher prices take hold, although he did acknowledge that the "economic outlook has improved considerably" since the Fed started a program in November to buy $600 billion long-term Treasuries.

That policy, known as quantitative easing, or QE2 for short, has been under frequent attack since it was announced. Critics -- including some within the Fed -- worry that pumping so much cash into the economy will spark inflation.

"The natural debate now is whether to complete the program, or to taper off to a somewhat lower level of asset purchases," St. Louis Fed President James Bullard said in a speech Thursday.

But on Monday Dudley argued against any early end to QE2. "Faster progress...would be very welcome and need not require an early change in the stance of monetary policy," he said.

In answer to a questioner who suggested that inflation is now the major U.S. export, Dudley said he strongly disagreed. Instead he pointed to political disruptions in the Middle East, bad food harvests and the rapid growth of major developing economies, such as China and India, as reasons for the rising commodity prices.

In fact, Dudley argued it is very unlikely that rising commodity prices will bleed into core inflation readings, which exclude such volatile segments as food and energy.

He said even if the U.S. economy started adding 300,000 jobs a month, far above recent gains, there would still be significant slack in the labor markets at the end of 2012. "The economy can be allowed to grow rapidly for quite some time before there is a real risk that shrinking slack will result in a rise in underlying inflation," he said.

He sees the only significant risk of inflation coming from an increase in inflation expectations by businesses and investors. But he said he's confident that the Fed has the tools it needs to reign in inflation quickly if necessary.

"If inflation expectations were to become unanchored because Federal Reserve policymakers failed to communicate clearly, this would be a self-inflicted wound," he said.

Still, NYU economics professor Thomas Cooley said Dudley's speech won't do much to convince the so-called "inflation hawks" among Fed policymakers.

"There's certainly dissension among the regional Fed presidents," Cooley said. "A lot of people are going to be concerned about how precarious the inflation situation is because of QE2."

As to Dudley's arguments that the Fed has the tools it needs to keep inflation in check, Cooley said said he thought it was an effective argument, although he added, "It hasn't been put to the test yet."