William C Dudley: US economic policy in a global context Remarks by Mr William C Dudley, President and Chief Executive Officer of the Federal Reserve Bank of New York, at the Foreign Policy Association Corporate Dinner, New York, 7 June 2011. *  *  *  It is a pleasure to have the opportunity to speak here this evening and I would like to thank the Foreign Policy Association for inviting me. The Association has served for decades as a catalyst for developing awareness and understanding of global issues and for providing nonpartisan forums for informed discussion. Your mission is clearly a worthy one – now more than ever. In this discussion I will highlight how the recent financial crisis and its aftermath have accelerated the shift in the relative importance of the so-called developed and emerging market economies. I will then discuss how the global economic system needs to adapt in light of the growing relative importance of the EMEs in the global economy. I will explore the implications of these changes for U.S. economic policy and I will also touch on some of the challenges the EMEs face as they seek to consolidate their gains and sustain their success. I will argue that the developed countries and the EMEs need to adjust in mutually supportive ways. In my view, the current relationship between the EMEs and the United States is not sustainable for either side.
More recently, the disinflationary tailwind in traded manufactured goods imported from China may have come to an end, at least for a period, as more of the increase in productivity there is captured in wage gains. Meanwhile, growing prosperity and urbanization in highly populous countries such as China and India has been the principal driver of a major, multiyear upward shift in the relative price of commodities. This move – a negative terms of trade hit for the United States – has pushed up the overall rate of inflation, at least temporarily. 6  BIS central bankers’ speeches  There are good reasons to believe that commodity prices will not continue to increase at the explosive rate of recent months. Households and businesses will adjust their activities in response to higher prices, and there will be a supply response to higher prices that will gradually build over time. In any event, a shift in relative prices, even if spread out over a number of years, should not to be confused with the onset of an ongoing inflation problem. But the uncertain future path of commodity prices does make the task of the central banker harder. It is the job of central bankers to ensure that changes in relative prices do not infect the general trend in prices. In the United States – unlike in many EMEs that are appropriately tightening policy – a large amount of slack and low unit labor cost increases provide a disinflationary counterbalance to commodity price gains.