The Corner

Bernanke’s Oil Chasers

No big surprise in yesterday’s Fed statement. The central bank didn’t change their 5.25 percent target rate and nobody thought they would. 

I didn’t really see any changes in the statement worth the usual gobbledygook reading. 

However, they did mention reduced impetus from energy prices: “Inflation pressures seem likely to moderate over time, reflecting reduced impetus from energy prices…”

Take a look at the following chart:

It shows the Fed’s policy in the last few years has basically been to shadow the price of oil. There’s an unbelievably compelling correlation going on there.

I happen to think the Fed is right on this point—they want to avoid monetizing oil. That would cause inflation to rise across the board, including non-energy sectors. That hasn’t happened. 

When you add it all up—the fact that the Fed has been shadowing oil prices, and the fact that oil has dropped way below the Fed funds rate line—it tells me that we’re gearing up for a lower Fed funds rate before too long. 

In fact, the next Fed meeting on December 12th would be great time for the central bank to surprise everyone with a timely rate cut.

After all, we want our Fed to be right on the money.

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