Fed-Fueled Feeding Frenzy?

The Federal Reserve was attacked
By many who cited the fact
Of unrest overseas
Since they started to ease,
A tack which the right never backed.  

"Food inflation is quite a misstatement,"
Said the Fed, "Of what lowering the rate meant;
For oil and wheat
Beat a hasty retreat
On the days when we signaled abatement."  

The Federal Reserve's "QE2" program of stimulating the markets through purchases of Treasury bonds has coincided with price increases of 30-50% for metals, fuels and food since last August. Hawkish commentators such as Larry Kudlow and right-wing bloviators such as Rush Limbaugh have seized on this fact to claim that the Fed's easing caused commodity inflation. The argument is that it created excess capital flows that bid up the prices of assets around the world. The criticism took on apocalyptic overtones when food protests erupted in Arabic countries and led to political upheaval.

In response, two reasearchers from the San Francisco Fed have published a rather polite study, which concludes that they "cannot provide evidence" that QE2 caused food inflation. The reason is that, on the days when new asset purchases were announced, commodity markets tended to retreat; the market therefore thought of QE2 as bearish for commodities. Left unanswered, however, is the question of whether excess capital did in fact cause more buying of commodities and the overall bullish trend.

The San Francisco Fed's omission does of course leave the field wide open for blogging poets to address this crucial question, which we will bravely attempt.