I don't think that quantitative easing monetary policy is the reason that oil prices are up in the past few months. The dollar, after all, has been quite stable, and oil prices are up in essentially all currencies. I think the main reason oil prices are up is the strength of emerging markets, the demand for energy from China and other fast-growing, emerging market economies.

That being said, we're watching it very carefully because, as you point out, higher gas prices are like a tax on families. And if they get too high, then that will in fact be a negative for growth as well as for inflation. So we will pay very close attention to both energy prices and other commodity prices as well.

During the Q&A session

It seems to me that a change in the conduct of monetary policy following the experience of the 1970s has probably caused inflation expectations to become better anchored, explaining why recent oil shocks have inflicted relatively little damage on the economy. This hypothesis could at least partly explain why the huge run-up in energy prices through the middle of last year was not accompanied by rising wage demands. That in turn enabled the Fed to follow an easier monetary policy that gave greater weight to the output effect of rising oil prices than would have otherwise been possible.

Since mid-2008, oil prices have, of course, plummeted. But the extraordinary weakness in the economy means that the usual trade-offs associated with such supply shocks are absent right now. Any boost to spending from falling oil prices will be more than welcome in the current circumstances. And with inflation now below desirable levels, a decline in inflationary expectations that could push core inflation down over time would be most unwelcome. I argued earlier that the Fed’s inflation credibility helped over a number of years to keep inflationary expectations anchored in the face of rising oil prices and high headline inflation. My hope is that inflationary expectations will remain similarly well-anchored now, serving to stabilize core inflation. The FOMC’s recently released longer-run inflation projections should be useful in this regard, helping to reinforce inflation expectations of around 2 percent.

The 12-month inflation rate through July was measured at 5.6 percent, the highest since 1991. This is a high and worrisome number...No matter how you measure it, the aggregate inflation we are experiencing in the United States at the moment is uncomfortably high.

...
I expect the recent decline in oil prices will begin to reverse some of the pressures we have seen on overall inflation in the first half of the year. But the underlying global supply pressures remain tight, and demand pressures remain relatively high. As such, any relief will likely be only partial.

Furthermore, some government estimates suggest little respite from food price hikes in the near term. At this point, it seems quite probable that PCE index inflation this calendar year will clock in at more than 3.5 percent and the CPI somewhere north of 4 percent—an improvement over the first half of the year, and trending in the right direction, but not numbers I would be comfortable with over the longer term.

Although recent measures of inflation are higher than I would like to see, I would say that recent price increases are more likely to be transitory than persistent. I expect that CPI inflation will peak near the July level of 5.6 percent. By comparison, in March 1980 the CPI peaked at 14.8 percent.
...
I concur with that view and believe current Fed policy is consistent with an easing in overall inflation given the dynamics of the economy. With weak growth and financial market strains, I believe the most likely outcome is that both headline and core inflation will diminish over the rest of 2008 and into next year as the temporary effects of energy and food price increases abate. Note that my outlook does not require that food and energy prices fall, but simply that their rates of increase moderate.

The markets in commodities, like those of stocks and bonds, are manic-depressive mechanisms and overshoot on the upside as well as on the downside. One could reasonably deduce from recent price reversals in oil and food prices that they overshot on the upside and that their price run-up was a one-off development. If you subscribe to this argument, you envision a process not unlike that of a python digesting dinner: It visibly moves through the system, creating some moments of discomfort—in this case, a temporary inflationary bulge—but is processed in reasonable time and done with.

It's going to depend on your forecast for that. So it's difficult to argue against futures markets that have a certain view built in that energy prices are going to, crude oil, for example, is going to be flatter down from here. But they've been wrong before, and there's a huge band of uncertainty around that central tendency of a forecast. So I think the most likely outcome is moderation in headline inflation over the next half year or year. Core inflation likely to rise to 2.5 percent or so. And I think it will moderate after that.

Another concern that has been raised is that financial speculation has added markedly to upward pressures on oil prices.  Certainly, investor interest in oil and other commodities has increased substantially of late.  However, if financial speculation were pushing oil prices above the levels consistent with the fundamentals of supply and demand, we would expect inventories of crude oil and petroleum products to increase as supply rose and demand fell.  But in fact, available data on oil inventories show notable declines over the past year.  This is not to say that useful steps could not be taken to improve the transparency and functioning of futures markets, only that such steps are unlikely to substantially affect the prices of oil or other commodities in the longer term.

In industrialized economies, such as the United States, rising inflation has chiefly reflected the surge in energy prices, whereas in developing countries, for which food takes up more of household budgets, rising food costs have been a more important culprit. The reasons for the trajectory and persistence of increases in prices of food and energy this year, as global growth has moderated, are not entirely clear. The upward trend in prices of food and energy over the past several years, however, importantly reflects the pressures posed by rapidly growing demand in developing economies against relatively inelastic global supplies of commodities.

I believe that consideration has to be given to the hypothesis that different forces have driven the relative prices of food and energy in the recent past—namely, shifts in demand in world markets. These forces are likely to persist for some time. In particular, I have in mind rapid increases in standards of living in large emerging-market economies. Associated with these increases in living standards are higher consumption of calories and higher consumption of energy and thus increasing demand in the global markets for these products. With low short-run elasticity of supply for food and energy production, these trends in demand generate trends in relative prices.

The results of such exercises imply that, over recent history, a sharp jump in oil prices appears to have had only modest effects on the future rate of inflation. This result likely reflects two factors.  First, commodities like oil represent only a small share of the overall costs of production, implying that the magnitude of the direct pass-through from changes in such prices to other prices should be modest, all else equal. Second, inflation expectations have been well anchored in recent years, contributing to a muted response of inflation to oil price shocks.  But the anchoring of expectations cannot be taken as given; indeed, the type of empirical exercises I have outlined reveal a larger effect of the price of oil on inflation prior to the last two decades, a period in which inflation expectations were not as well anchored as they are today.

More comprehensive statistical work by researchers at the Boston Reserve Bank concludes that the impact of relative price shocks from oil – and other related supply shocks – has had a very minor impact on the underlying rate of inflation.

Over the past year, the economy has been buffeted by a series of shocks including financial turmoil; an emergency acquisition of a major investment bank to avoid a sudden, disorderly failure [Footnote 2]; falling national housing prices; and oil prices that have exceeded $130 a barrel. Despite all these challenges, the U.S. unemployment rate is at 5 percent; the rise in prices of “core” consumer goods and services (Personal Consumption Expenditures) to a little above 2 percent, while unwelcome, has not been large compared with past episodes; and the economy has been growing, albeit at a much slower pace then we would prefer. These relatively benign outcomes to date are at least partly the result of recent monetary and fiscal policy actions taken to mitigate some of the problems facing the economy.

Asked if there is any way to pump liquidity into the markets without reinforcing commodities speculation, Rosengren said that, "Unfortunately, we don't have much control over where the money goes after we push it into the market."

The purpose of the liquidity provisioning "has not been to cause commodity speculation," he said. "I think there have been some very beneficial things to come out of liquidity moves."

From Q&A as reported by Market News International

One of the first rules you learn if you're working for the Federal Reserve is to leave comments about the dollar to the Treasury. I'm more
than happy to adhere to that rule ... Having said that, I'd be careful about mistaking correlation and causation. Just because energy prices and the dollar seem to move together -- pick any two prices or [indistinct] you happen to be interested in -- just because they happen to move together doesn't mean there's a causation there.

From Q&A as reported by Market News International

At a time when commodity prices are rising as rapidly as they are, inflation is a concern. [Those price hikes, especially for energy and food, are taking] a huge toll on households.

From press Q&A as reported by Reuters

Determining appropriate policy necessarily involves more than figuring out the neutral real federal funds rate. This reality is especially obvious at present. Inflation has been elevated for some time and prices of commodities are surging. I find these trends particularly vexing at a time when global demand growth, most likely, has slowed.