Fed Is Restricted by Its Congressional Mandate
Letter to the Editor

Resident Fellow
Desmond Lachman
Your editorial suggesting that the Federal Reserve should raise interest rates to address the global inflation problem ("Fed cannot ignore global inflation", June 26) overlooks the fact that the Fed is restricted by its dual congressional mandate to pursuing U.S. price stability and U.S. employment and economic growth. It also ignores the fact that the world is not an optimum currency area, which would imply that, under a fixed exchange rate system, one should not expect a single Fed interest rate policy to meet simultaneously the needs of the U.S. and of the emerging Asian and Middle Eastern countries.

In a world of capital mobility, an important part of any solution to the Asian and Middle Eastern inflation problem must be a move by the countries of those regions towards greater exchange rate flexibility. Such a move would allow those countries to regain monetary policy independence from the U.S. and to set domestic interest rates at levels appropriate for their economies' fight against inflation.

Greater exchange rate flexibility in Asia and the Middle East would also be helpful in addressing the global payment imbalance problem and it would relieve the euro of having to bear the full burden of the dollar's adjustment. It is far from obvious that greater exchange rate flexibility in Asia and the Middle East would necessarily lead those countries to start selling dollars in a manner that would provoke a dollar crisis.

The countries of Asia and the Middle East would be making a grave policy mistake in persisting with quasi-fixed exchange rate policies and in waiting for the Fed to raise interest rates for their benefit. This would seem to be especially the case at a time when the U.S. is facing the real risk of a prolonged and nasty recession under the weight of its worst housing and credit market busts in the post-war period and of a major oil price shock on a scale of that in 1979.

Desmond Lachman is a resident fellow at AEI.

Also Visit
AEIdeas Blog The American Magazine
About the Author

 

Desmond
Lachman

What's new on AEI

Holder will regret his refusal to obey the Constitution
image 'Flood Wall Street' climate protesters take aim at their corporate allies
image 3 opportunities for better US-India defense ties
image Is Nicolás Maduro Latin America's new man at the United Nations?
AEI on Facebook
Events Calendar
  • 29
    MON
  • 30
    TUE
  • 01
    WED
  • 02
    THU
  • 03
    FRI
Thursday, October 02, 2014 | 9:00 a.m. – 10:30 a.m.
Campbell Brown talks teacher tenure

We welcome you to join us as Brown shares her perspective on the role of the courts in seeking educational justice and advocating for continued reform.

Friday, October 03, 2014 | 12:00 p.m. – 1:00 p.m.
Harnessing the power of markets to tackle global poverty: A conversation with Jacqueline Novogratz

AEI welcomes you to this Philanthropic Freedom Project event, in which Novogratz will describe her work investing in early-stage enterprises, what she has learned at the helm of Acumen, and the role entrepreneurship can play in the fight against global poverty.

No events scheduled this day.
No events scheduled this day.
No events scheduled today.
No events scheduled this day.
No events scheduled this day.
No events scheduled this day.