Janet Yellen was making the rounds again yesterday trying to convince the world that QE2 has had no impact on commodity prices. In a speech at the Economic Club of New York she outlined the three reasons why she believes QE2 is having no impact on commodity prices:
“In contrast, the arguments linking the run-up in commodity prices to the stance of U.S. monetary policy do not seem to hold up to close scrutiny. In particular, some observers have pointed to dollar depreciation, speculative behavior, and international monetary linkages as key channels through which accommodative U.S. monetary policy might be exacerbating the boom in commodity markets. Let me address each of these possibilities in turn.
First, it does not seem reasonable to attribute much of the rise in commodity prices to movements in the foreign exchange value of the dollar. Since early last summer, the dollar has depreciated about 10 percent against other major currencies, and of that change, my sense is that only a limited portion should be attributed to the Federal Reserve’s initiation of a second round of securities purchases. By comparison, as I noted earlier, crude oil prices have risen more than 70 percent over the same period, and nonfuel commodity prices are up roughly 40 percent. Put another way, commodity prices have risen markedly in all major currencies, not just in terms of U.S. dollars, suggesting that the evolution of the foreign exchange value of the dollar can explain only a small fraction of those increases.
A second potential concern is that U.S. monetary policy is boosting commodity prices by reducing the cost of holding inventories or by fomenting “carry trades” and other forms of speculative behavior. But here, too, the evidence is not compelling. Price increases have been prevalent across a wide range of commodities, even those that are associated with little or no trading in futures markets. Moreover, if speculative transactions were the primary cause of rising commodity prices, we would expect to see mounting inventories of commodities as speculators hoarded such commodities, whereas in fact stocks of crude oil and agricultural products have generally been falling since last summer.
A third concern expressed by some observers is that the exceptionally low level of U.S. interest rates has translated into excessive monetary stimulus in the EMEs. In particular, even though their economies have been expanding quite rapidly, many EMEs have been reluctant to raise their own interest rates because of concerns that higher rates could lead to further capital inflows and boost the value of their currencies. Some argue that their disinclination to tighten monetary policy has in turn resulted in economic overheating that has generated further upward pressures on commodity prices.
I do not think this explanation accounts for much of the surge in commodity prices, in part because I believe that the bulk of the rapid economic growth in EMEs mainly reflects fundamental improvements in productive capacity, as those countries become integrated into the global economy, rather than loose monetary policies. Irrespective of monetary conditions in the advanced foreign economies, it is clear that the monetary and fiscal authorities in the EMEs have a range of policy tools to address any potential for overheating in their economies if they choose to do so. Indeed, in light of the relatively high levels of resource utilization and inflationary pressures that many EMEs face at present, monetary tightening and currency appreciation might well be appropriate for those economies.”
Mrs. Yellen might be interested in a paper by the BOJ – a bank that has a bit more experience with QE than their American counterparts: