Professor Marvin Goodfriend, Chairman of The Gailliot Center for Public Policy, Carnegie Mellon University, is a US expert on central bank policy and monetary theory. He was a guest of the Centre during the week of June 9 to 13, speaking to CEOs as part of the US Business Leadership Forums in Sydney and Melbourne, and to executive audiences at evening events in both cities.

Professor Goodfriend has an unusual blend of experience, as a Senior Vice President in the US Federal Reserve system coupled with academic research during his work with the Federal Reserve and as a Professor at Carnegie Mellon University.

In the executive forums, Professor Goodfriend spoke about the US economic outlook and the challenge the world's central banks face in managing the recent surge in prices of fuel, food and other commodities. He noted that US productivity growth is strong, which coupled with sluggish demand has resulted in job losses, but without putting inflationary pressure on wages. He contended that the United States is not yet in a recession and consumers will soon gain the benefit of the tax rebates now being sent out to households. This should provide economic stimulus during the summer months, giving time for the current zero real interest rate environment to take effect.

Central bank policy is being constrained by the persistence of inflation in the non-core sectors of the world's economies (fuel, food and commodities) as a result of an economic transformation on a scale greater than the world has ever seen before: the rapid rise of China and India, along with other developing countries. Since production of commodities responds slowly to demand, the increasing appetite of these countries is pushing up prices. Professor Goodfriend was clear that central banks need to continue to focus on inflation. He was concerned, however, that in the current low-interest rate environment, banks might fail to contain inflationary pressures, which might lead to the need for a heavy response and resultant recession.

Professor Goodfriend also gave seminars to staff of the Treasury in Canberra and the Reserve Bank in Sydney, in which we discussed his work on the evolution of a new policy consensus among central banks world-wide focused on inflation targeting (either explicitly or implicitly). Central banks, he said, now recognised that this was "the only game in town". In an examination of the actions of the Federal Reserve during three periods of zero real interest rates since 1977, he concluded that success in emerging from such periods without recession was mixed. This would be increasingly difficult to achieve under the current circumstances of unusual pressure on commodity prices.