Academic journal article ABA Banking Journal

Is the Tail Beginning to Wag the Dog?

Academic journal article ABA Banking Journal

Is the Tail Beginning to Wag the Dog?

Article excerpt

JUST WHEN IT APPEARS THE Fed is beginning to feel comfortable with domestic economic conditions and has begun communicating that it is about done raising short-term interest rates, the international economic and financial environment threatens to unravel those best-laid plans.

Rising to the top of the list of potential disrupters is the relentless push higher by metals and energy prices. Despite the Fed's best efforts to contain consumer inflation, global commodity prices remain largely out of the Fed's sphere of influence. Copper prices, for example, rose more than 30% over the last year. For oil, the Iran crisis and political unrest in Nigeria are certainly playing a role. Saudi Arabian officials have recently indicated that the Kingdom is currently pumping all its capacity. This is significant, because Saudi Arabia is one of the only OPEC countries thought to have some spare oil capacity.

Moreover, one of the biggest fears that must keep Fed Chairman Ben Bernanke up at night is an unforeseen economic or financial shock originating overseas. While the U.S. remains a major source of global demand, it is no longer the dominant source. All the major international organizations--the Asian Development Bank, International Monetary Fund, and World Bank--have recently raised their global growth forecasts for 2006. The IMF recently raised its global growth forecast to 4.9% for 2006, 0.6 percentage points higher than the forecast of last September. …

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