Speaking at a conference organized by the International Monetary Committee on Tuesday, Fed Chairman Ben Bernanke, European Central Bank President Jean-Claude Trichet and Bank of Japan Governor Masaaki Shirakawa agreed that persistent inflation pressures were one of the risks being faced by central banks.
Fed Chairman Ben Bernanke said the Federal Reserve is "attentive" to the slide in value of the U.S. dollar and that it has caused an "unwelcome" rise in import costs. He also said that interest rates are currently "well-positioned" for growth and stable prices and that the Fed will "act as needed" to meet the bank's mandate relating to both growth and prices.
"We are attentive to the implications of changes in the value of the dollar for inflation and inflation expectations and will continue to formulate policy to guard against risks to both parts of our dual mandate, including the risk of an erosion in longer-term inflation expectations," he added.
Bernanke also said the Fed has cut rates "substantially and proactively" and that the Fed's commitment to its dual mandate will be key to ensuring the U.S. dollar remains strong and stable.
Bernanke explained that inflation is high, but noted the pass-through of costs to labour and products has so far been limited.
European Central Bank President Jean-Claude Trichet stated that the global economic situation was challenging and that the disinflationary effects of low-cost nations were decreasing.
"Inevitably, the process of unpicking and understanding shocks and complex interactions affecting the economy is an ongoing task," Trichet stated.
"Clearly we need to be sure that the analysis underpinning policy decisions incorporates an appropriate understanding of the complexities of our global system."
Bank of Japan Governor Masaaki Shirakawa said that central banks are facing a "difficult balancing act" with rising global inflation pressures and downside growth risks, and that monetary policy at the BOJ had been "extremely accommodative."
Inflation expectations in Japan are rising, promoting upside risks to CPI over the course of 2008 and 2009, Shirakawa added.
In the discussion that followed, the central bankers agreed that maintaining inflation expectations was important. Bernanke added that while it was difficult to manipulate short-term inflation pressures, central banks had good control over medium-term inflation expectations.
Trichet said that inflation remained a monetary phenomenon and reiterated the necessity for maintaining price stability. He added that European Central Bankers felt vindicated in keeping their focus on headline rather than core inflation given the recent gains in oil prices.
Bernanke also acknowledged that the weakness in the greenback had made "modest" contributions to rising commodity prices while Trichet said that the European Central Bank has no short-term tools to address the situation.
Bernanke pointed out that identifying bubbles in the early stages was s difficult thing to do and that interest rates were a "blunt" tool for piercing them. Shirakawa agreed, adding that monetary policy alone was insufficient to resolve such problems.
Bernanke instead said the focus should be on building a resilient financial system through regulation and the Federal Reserve is working with investment banks. He added that the crisis has demonstrated a need for firms to have sufficient capital and that sufficient communication with banks is the best oversight. Nevertheless, Bernanke acknowledged that there was no quick solution to the problem.
By Erik Kevin Franco with contributions from Stephen Huebl, Todd Wailoo and Steve Stecyk and edited by Nancy Girgis