How will the Fed respond to plummeting oil prices?
The Federal Reserve is expected to make some big announcements this week on the heels of meetings in Washington where Janet Yellen and her colleagues will discuss the health of the U.S. economy. One subject that will undoubtedly come up: Plummeting oil prices. As of today, oil is hovering right around $60 a barrel. So how will oil’s new low, low price affect the Fed’s anticipated policy changes?
Let’s start with inflation. One of the Fed’s stated goals is to increase inflation in the U.S. from its current 1.7 percent, to a target rate of 2 percent, “and all that’s going on in the energy sector is somewhat disinflationary if not deflationary,” says Marilyn Cohen, president of Envision capital management. She thinks falling prices in the energy sector could make the Fed cautious about raising interest rates.
But Americans spending less on fuel means consumers have more money for goods and services, “and that,” says former Fed economist Morris Davis, “should create, or at least be correlated, with new job creation.”
Money not being spent on oil would do more good for the economy than the hit that U.S. oil companies will take, and Davis thinks the Fed sees these low oil prices as a new, longer term reality. “If that’s what the Federal Reserve is thinking then they would I guess, assume an extended boom on these low oil prices.”
A continuing boom would be a signal to the Fed that says “go ahead, raise interest rates.” The Fed will issue its statement on Wednesday.
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