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RallyCry (< 20)

6 Reasons The Fed Doesn't Care About Higher Oil Prices

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February 28, 2012 – Comments (5) | RELATED TICKERS: XOM , COP , WPRT

1.) The Fed will be able to validate their statement that interest rates will remain low until 2014.

2.) The resulting U.S. GDP slump will give QE proponents ammunition to keep rates low by instituting further easing initiatives.

3.) The alternative energy policies pursued by the U.S government will gain wider acceptance when gas prices move to record levels.

4.) If Iran explodes, the Saudi's can step up supply and if the U.S goes to war it will boost U.S. economic growth. These developments should partially offset a U.S. recession triggered from higher oil.

5.) If U.S interest rates stay low, the Europeans can continue to offer competitive rates on debt instruments. The U.S. bond market won't be offering higher interest rates to lure away global capital. European bonds will look attractive when a 10 year U.S Treasury will pay less than 2% for the next few years.

6.) U.S equity markets will continue be attractive on a valuation basis compared to U.S bonds. Stocks should be able to outperform in a low rate environment as long as a geo-political solution to Iran is reached in a reasonable amount of time.

5 Comments – Post Your Own

#1) On February 28, 2012 at 5:35 PM, leohaas (31.19) wrote:

One reason the FED does care:

Per a 1977 Amendment to the Federal Reserve Act, the goal of the FED is:
 - to promote maximum sustainable output and employment and
 - to promote stable prices.

You may say that the FED is not very good at attaining these goals. But that is someting entirely different than not caring about higher prices in general. I don't believe the act has been amended to exclude oil. Consequently, the FED is required to care about higher oil prices.

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#2) On February 28, 2012 at 6:02 PM, RallyCry (< 20) wrote:

Following this price stability mandate, the Fed should raise interest rates to combat higher inflation as they did in 2006 if CPI ticks above 3%.

They are not going to raise rates this year... unless they have little or no control over rates to begin with. In that case, its a joke that they declared rates will be low until 2014. Who is really believing them?

It is precisely because the Fed is not good at attaining the goal of stable prices that it is irrelevant if they care about fuel prices or not. When you print money indefinitely prices rise by default since the dollar is in decline. What tangible proof do we have that these actions are consistent with the Amendment of 1977?

As the Austrian school will tell you monetary inflation leads to price inflation. 

If Oil zooms past $140 again, they won't raise rates. I say this is equivalent to not caring about oil prices.  It might be $8 gasoline or $200 a barrel before they would move to raise rates.

But in truth, they primarily care about keeping interest rates low and not having Europe derail the entire financial system.

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#3) On February 29, 2012 at 8:34 AM, RallyCry (< 20) wrote:

I wonder how many Fed presidents drive to the committee meetings? I would venture to say zero. This is the kind of detail someone like Ron Paul should grab onto to demonstrate the disconnect between the Fed and everyday Americans suffering from high oil prices.

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#4) On February 29, 2012 at 4:29 PM, leohaas (31.19) wrote:

Straight from the horse's mouth:

In testimony to Congress, Bernanke said that keeping monetary stimulus is warranted but climbing energy costs would likely hike inflation temporarily and that the decline in the nation’s jobless rate had been more rapid than expected. Read more about Bernanke’s testimony. 

So the FED does care, at least in words. At this point, they do not believe CPI will get above 3% until 2014, and that is why they can promise to keep rates low until then. It would not surprise me if they will raise rates before 2014 if CPI goes clearly above 3% (not 3.1 or 3.2, maybe not even at 4, but they will have a number in mind at which they will pull the trigger). But the price of gasoline only has a small impact on CPI, so gasoline will have to go up quite a bit to significantly move CPI.

Mentioning the Austrian school when talking about what FED is currently doing is not really useful: none of the FED members belong to the Austrian school.

It is silly to make an argument based on what you call "printing money indefinitely". Indeed, with an indefinite supply of dollars, the value would be zero. But that is not the case, so I will not respond to the allegation.

There can be no doubt oil will go past $140 or $200 (or pretty much whatever number you come up with). That is mainly because of supply and demand. The former just is not keeping up with the latter. Add to that the current saber rattling with Iran, and prices will only go one way: up.

PS.  If you believe that gas will be $8 when oil hits $200, then you should invest now in a refiner: at those prices, the crack spread would be well over $100 per barrel!

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#5) On February 29, 2012 at 8:25 PM, RallyCry (< 20) wrote:

I wish the veil could be lifted and some level of transparency between Federal Reserve words and actions could be determined in an analytical way instead of trying to draw conclusions based on voice inflection, mannerisms, number of times a word is repeated etc...or expect to extract wisdom from the meeting minutes like we are reviewing the writings of a great philosopher or awarding an oscar for best non-dramatic interpretation of non-fiction in a manuscript.

However, these Fed bankers are given a polite respect in interviews and during testimonies where critical questioning and empassionated criticism never get sufficiently exercised.

Bernanke tip toes and gives economic "on the one hand" "and on the other hand" platitudes that serve only to accept and reject assertions in the same response. Congress ends up being his dance partner with obvious questions that allow for obvious non-answers. All thats left for the general public is a big horse and pony show.

We are all better off listening to the President's spokesman for a similiarly unengaging but artful dance that does anything but make an impact on any critical issue other then to restate the official position and recycle statements made by the President.

*Stepping down off of soap-box*

Rallycry

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