Scathing editorial in today’s WSJ: The Fed’s Blunder
Eight months into the Fed’s most recent rate-cutting spree, the evidence is overwhelming that it has been a major policy mistake. Aggressive rate cutting – taking the fed funds rate to 2.25% from 5.25% last September – has had little effect on the banking crisis it was supposed to ease.
Meanwhile, the Fed’s decision to open the general monetary spigots has inspired a global commodity boom unlike any since the 1970s. Oil has climbed to nearly $119 a barrel today from $70 in late August, a 70% increase. Farm and other commodities have seen a similar surge, with corresponding increases in food prices leading to shortages and riots in Egypt and other places, and to rice hoarding even in Southern California.
The popular media explanation is that this price surge is a result of rising global demand, greedy speculators and human profligacy. All of a sudden, without warning, the world is said to be running out of food. After 30 years in intellectual hibernation, Thomas Malthus and the Age of Scarcity are back in style.
As for food prices, it’s true that government policies supporting biofuels have created new demand for corn and other grains. This and price controls in some countries have contributed to the food panic. But the price surge has been so rapid and so broad across nearly all commodities that it can’t merely be a function of supply glitches or new demand for specific grains.
I agree with almost everything here except the editors’ certainty that rising prices are caused by monetary policy alone. As with all inflationary periods, the current one is caused by some combination of two factors: rising demand and monetary policy.