U.S. Fed's optimism on economy high-stakes oil bet

U.S. Fed’s optimism on economy high-stakes oil bet – Reuters.com

But many economists and former Fed officials saw the U.S. central bank’s decision on Tuesday to stick to a course of gradual rate rises as a high-stakes gamble that energy prices can be brought under control.

When I saw the first news on the rate increase, my initial response was something like “well, they figure the June numbers were caused by oil prices and expect that to self correct.” Then I thought a little more about it and realized that the Fed did take account of oil prices here and is doing exactly the right thing in the face of rising oil prices, granted that it’s a happy coincidence that what oil markets need is what the Fed was already biased towards. Ok, as the wizard of Cheek Hall might say, “what the hell is Hanna talking about”? Simply this. Among the many factors pushing oil prices higher is an incredibly weak dollar brought on by an expansionary monetary policy. The reason we haven’t seen inflation in most sectors is because of productivity growth and the willingness of our trading partners to take dollars for goods and not ask for anything back. In spite of that, the dollar has been inflated and unlike many imports oil markets are showing the effects.

Now, there are lots of reasons that are causing oil prices to go up and the price of oil is compounded in terms of gasoline prices by things like a lack of refinery and distribution capacity and the ridiculous number of blends of gasoline, (Thanks to Kevin for pointing out that article.) but the one thing the Fed can do anything about is the overly weak dollar and they are doing it. A happy coincidence and another reminder of how interconnected markets are, law of unintended consequences and all. Though, I’m sure Mr. Greenspan was well aware of the potential effect of a small rate rise on all markets including oil.

More on oil on my site Financial Options including The Secret Way to Play Oil.