SANTIAGO (Reuters) - St Louis Federal Reserve President William Poole said on Friday that oil supply shocks need not cause recessions and were no excuse for a central bank to allow inflation to escape its control.
“Without question, energy supply shocks are disruptive, but they need not create recessions,” Poole, a voting member of the U.S. Federal Reserve’s interest rate-setting committee this year, told a business breakfast at the American Chamber of Commerce here.
“Indeed, there is a more general lesson from experience with oil price shocks. Monetary policy should not allow an economy to operate at the edge of a cliff,” said Poole, who blamed the inflation of the 1970s on “over-expansionary monetary policy, not oil shocks.”
More recent experience with rising oil prices has been a happier one for the United States, thanks to a less energy-intensive economy and the fact inflation has been kept low and stable.
“In these circumstances, monetary policy is in a much better position to support aggregate demand in the face of oil shocks without endangering medium-term price stability,” he said.
The view that the 1973 oil crisis was set off purely by the embargo of Arab oil-producing countries was widespread but inaccurate, Poole said. Instead, he pinned the blame on strong demand for oil as the U.S. economy ran too fast, with the Fed making matters worse by failing to spot these conditions.
“The economy was already overheated by 1973, so some reining in of spending by monetary policy was justified even before the oil shock.
“Once the oil shock took place, monetary policy needed to tighten, just to keep supply and demand from going further into imbalance,” he said.
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