As evidence of the aforementioned risks, Mr. Shirakawa reminded Mr. Bernanke that commodity prices have been spiking. Meanwhile, Mr. Shirakawa’s institution is still grappling with how to lift Japan’s inflation to its targeted 2% level as supply continues to overwhelm demand and as the country remains mired in deflation. The BoJ’s new inflation target has now been lowered to 1%. There is no question that speculators drunken on the Fed’s easy money have been boosting commodity price tags and that they were exhibiting some forward-looking inflation-based concerns in the process as well.
In addition to such words of caution and advice, the Fed’s own team members have now shown some doubts about the very effectiveness of balance sheet-based monetary policy. Philly Fed President Charles Plosser is of the opinion that the US central bank ought not to conduct monetary policy via its asset basket as it risks losing its independence in the process. Mr. Plosser noted that the Fed’s actions may have made the distinctions between monetary and fiscal policies somewhat fuzzier in recent years, and that such a paradigm is not very desirable.
There is a risk that fiscal discipline is dis-incentivized in a situation where a central bank creates its own form of “moral hazard” and that the public will come to view such policies in a very critical manner. Such views are now quite common in the business community, which, albeit giving high marks to the Fed for what it has done to resuscitate the US economy and for becoming more transparent in its policies, is obviously leaning towards the ending of the current low rate strategy sooner rather than later.
Bloomberg News reports that “most economists said the central bank’s pledge to keep interest rates low through late 2014 had gone too far. Just 6% of those polled said the rate should be kept low for that long or beyond. Twenty-six percent said the pledge should extend through mid or late 2012, 29% favored mid or late 2013, and 3% said through mid-2014. The remaining 36% said the Fed should provide no guidance.”
Thirty-five percent of those polled also said that the Fed’s current fiscal policy was too “stimulative.” This, despite certain rumblings that the Fed might offer an “inflation-sanitized” QE program when it next meets on April 25. On the other hand, the survey also revealed that practically no one was afraid that the Fed might lose control and let inflation out of the bag and that its plans to keep prices climbing at around 2% per annum will assist in making monetary policy become more effective.