11.14.06
How Do Oil-Price Shocks “Pass Through” The Economy?
That’s the question Eric Fisher and Kathryn Marshall attempt to answer in the latest edition of the Bank’s Economic Commentary series. Fisher and Marshall use input and output tables—a way to represent how each sector in the economy is connected to all others—to trace the impact of a rise in the price of a barrel of crude oil on the prices of goods and services in other parts of the economy. Under the assumptions of their analysis—which essentially maintain constant production and no adjustments in the use if energy inputs—the pass-through effects are completed in roughly one year, and touch nearly all parts of the economy. The authors conclude that a 100 percent increase in the price of oil will raise overall prices by about 3.2 percentage points. The good news? With an appropriate monetary policy response, the effect on prices will only be temporary and not inflationary.
11.20.06
Milton Friedman, in memoriam
During the heady days of the 1960s, the conventional wisdom in economics held that monetary and fiscal policies could be designed to “fine tune” economic activity. Policymakers thought that by manipulating the various tools at their disposal--fiscal, monetary, and exchange rate policies--they could, for example, predictably control spending and thereby eliminate recessions. But ironically, inflation was viewed as a consequence of unfortunate events, not the policies of the central bank. The conventional view was so dominant, alternative theories were often met with ridicule. This did not intimidate Milton Friedman. In the late 1960s, he began to question the status quo. Professor Friedman understood that the conventional policy prescriptions had the effect of constantly increasing the money supply, a practice that over time would have serious inflationary consequences. Ultimately, economic prosperity would suffer. His bold prediction was borne out in the 1970s. Central banks around the world are deeply indebted to Professor Friedman for giving them the framework necessary to avoid making such a mistake again.
Milton Friedman, Nobel Laureate, died on Thursday, November 16, at age 94. We extend our condolences to his family and to his many devoted students. We consider ourselves a fortunate member of that latter group. For an informative look at his life and contributions, try this New York Times article.
11.30.06
How's the Fourth District Doing?
The Beige Book summarizes national and district economic trends based on the comments of business contacts and others outside the Federal Reserve. Recently, the Fourth District (Ohio, eastern Kentucky, western Pennsylvania, and the panhandle of West Virginia) has frequently stood out by having weaker growth than the nation as a whole.
This was not the case in the latest Beige Book release (November 29, 2006). Cleveland contacts reported that “Economic activity in the district grew at a moderate pace since early October. . .” despite “. . . the housing market, restructuring in the auto sector, and some raw material prices [which] have tempered enthusiasm.”
This pattern was repeated in several districts, but these areas of weakness were typically offset by continued growth in other manufacturing, commercial construction, and retailing.
On the pricing front reports from our district (and most other districts) were pretty benign. We said: “Wage pressures are not seen as an issue at this time. Almost all contacts said that, with the exception of metals, the rise in input costs continues to moderate. Manufacturers attempting to raise their prices met with a mixed degree of success. And almost all retailers reported that they were holding their prices steady.”
You can run your own comparisons of Federal Reserve District Beige Book reports on our Beige Book page.