Inflation says it all

To rise or not to rise, that is the question.

A streak of the central banks' meeting last week signaled the age of divergence to achieve the desirable path to price stability. Among four of the largest economies' central banks, the Fed, the ECB, the BoJ, and the BoE, which discussed the course of monetary policy amid a weak recovery, only the Fed loosened its grip on monetary policy to start buying long-term Treasury securities, dubbed QE2, as widely expected. The other three central banks, which convened after the FOMC meeting, kept their stance, though the BoJ decided last month to pump more money into the economy by purchasing JGB, REIT, and corporate bonds.

What split their responses? Just look at inflation, and you'll have a clear reason behind it. CPI inflation rate in the UK and Euro zone, whose central banks didn't move, is higher than the US and Japan, both of which resumed printing money.

Let's see how they think about inflation. The FOMC statement declares that measures of underlying inflation are somewhat low, relative to levels that the Committee judges to be consistent, over the longer run. The Fed's Chairman Ben Bernanke, of course, hasn't forgotten the mandate of the central bank as holding inflation at a low level.

"We are absolutely committed to keeping inflation low and stable," Bernanke said in response to a question at Jacksonville University. "We have the tools to unwind and tighten policy at the appropriate time, when that time comes."

All the more important right now is, however, to keep deflation at bay.

"We're not in the business of trying to create inflation, our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation, which I think we all agree could also be worrisome."

...

"We've had a very significant disinflation since the beginning of the crisis. We should not be satisfied with a situation where we have both a large amount of slack on the employment side and inflation which is below our generally agreed upon level and seems to be declining over time."

The ECB President Jean-Claude Trichet, on the other hand, described risks to the inflation outlook as "slightly tilted to the upside," and even reiterated his intention to stick to an exit strategy, saying "the non-standard measures that we have taken are, by definition, of a transitory nature."

Thus, views on the outlook of inflation are one of the main drivers which divided the major central banks' reaction to the current economy last week.

Meanwhile, German Finance Minister Wolfgang Schaeuble wasn't patient enough to contain his complaint on the Fed's policy.

"I have great doubts about whether it makes sense to pump unlimited amounts of money into the markets," Schaeuble told Der Spiegel news magazine. "There is no shortage of liquidity in the U.S. economy. I can't see the economic argument for this move."

The U.S. central bank's decision to extend its program of quantitative easing raised uncertainty in the world economy, he said.

"It will make it difficult to get a reasonable balance between the industrial and emerging nations and it undermines the credibility of U.S. financial policy," Schaeuble said.

He has repeatedly criticized the U.S. plan to buy debt and pump more money into the economy to prop it up. He also defended Germany against criticism of its trade surplus.

"The German export success is not due to any currency tricks but rather due to the improved competitiveness of German companies," Schaeuble said. "The American growth model is stuck in a deep crisis."The United States has lived beyond its means for too long, its financial sector is disproportionally inflated and its industrial core neglected. There are many reasons for America's problems ... the German export surplus is not one of them."

Schaeuble also criticized U.S. foreign exchange policy. "It's not right when the Americans accuse China of manipulating exchange rates and then push the dollar exchange rate lower by opening up the flood gates by turning on the printing presses," he said.

On Friday he said U.S. monetary policy was "clueless."

German Finance Minister was also reported to liken the Fed's quantitative easing to China's currency policy.

"At the moment, from a European viewpoint, one could get the impression that the U.S. is doing through other means what it is reproaching China for," Schaeuble said at a conference in Berlin.

"One could get the idea that the instruments are different but the goal is the same, and the one who suffers are clearly...to a certain degree the Europeans," the minister argued.

Well, Germans definitely have something to worry.

The Japanese, in turn, seems like too well-behaved to raise a concern, despite the yen's sharp appreciation. Japanese Finance Minister Yoshihiko Noda made no comment when asked about the Federal Reserve's latest monetary easing, though admitting to have to closely watch the US economy and monetary policy (in Japanese). The BoJ Governor Masaaki Shirakawa dismissed the idea of monetary easing race, saying "I do not see Japan and the United States as in a monetary easing competition."

Bernanke rebutted critics who claim that the Fed's monetary policy has given birth to the weak dollar.

"The best fundamentals for the dollar will come when the economy is growing strongly," Bernanke said today in response to questions from college students in Jacksonville, Florida. "That is where the fundamentals come from. We are aware the dollar plays a special role in the global economy."

"A strong U.S. economy is critical not just for Americans but for a global recovery," he added. "So in that respect it is very important we do achieve a faster recovery in the U.S."

Surprised, NYT wrote, "In commenting on the dollar, Mr. Bernanke was making an unusual departure from custom. By tradition, the dollar is the purview of the Treasury secretary and monetary policy is the domain of the Fed chairman, and neither official steps on the other's turf."