What is going on with oil and the Fed?

By
Mortgage and Lending with Wells Fargo Home Mortgage

Hey guys-

I just thought you guys might enjoy reading this info about oil,a nd the relationship to the Fed.  The Fed met today, and this is some insight into the economy.  Hope you enjoy!

This is a bit lengthy but well worth reading.

Fed Day is here once again, and there's lots of anticipation about the Fed's Policy Statement this afternoon. There will not be a change in rates, but the Fed will likely be more hawkish in their comments and concerns about inflation. This should help mollify some members of the Fed like who have been very concerned about inflation.

I actually agree with a more hawkish view and although the Fed will not hike, I hope they decide to do so sooner than later. There is a possibility of a hike in August but it is not likely. The Fed is in a tough spot - the economy stinks, housing is struggling, confidence is low and costs are rising. You need only look at your last receipt from the grocery store or gas station to see how quickly things have changed. And a walk through your local shopping Mall tells another story of individuals who are less able to spend. That is the Fed's problem...the smart move is clearly to hike. Inflation is rapidly eating away the value of money. And while food price increases hurt, oil is the real story. So why has oil risen so wildly? The answer...The Fed. The evidence is too clear to ignore.

Take a look at where we were before the first Fed cut on September 18th. The Fed Funds Rate was at 5.25%, Oil was at $73 per barrel and the Euro was $1.35. Not great, but not bad. Fearing a recession, the Fed did the right thing to stimulate the economy, they cut. But cutting rates in the US makes higher rates in Europe appear much more attractive. So the Dollar began to tank against the Euro and just got worse as the Fed continued to cut. Now it takes $1.56 to equal one Euro. That is a huge swing. And here is where it gets interesting, oil is priced in dollars, so as Dollars decline, oil price per barrel must rise. Oil has gone from $73 a barrel before the Fed cuts to yesterday's close of $137 a barrel.

And the European Central Bank President has been talking about a rate hike in Europe, even though they are headed for a recession. Remember there is a big difference between the US Fed and the ECB - the US has a dual mandate, fight inflation and promote growth. The ECB just fights inflation. And just the talk of a hike from the ECB has sent oil even higher.

Again, oil prices are surging mainly because of the dollar weakness and the Fed cuts. Think about it, has demand for oil suddenly skyrocketed in the past 8 or 9 months? Sure it has gone up, but oil had already doubled in price when it was at $70. And higher prices for oil hurts everything. Sure at the pump and for heating, which allows less to spend, but travel, manufacturing, shipping...the list goes on and on.

In today's news, new home sales for May were reported inline with expectations. The inventory of new homes rose to a 10.9 monthly supply. This report suggests the new home sale market is still struggling.

From a technical aspect bonds continue to trade in a wide 100bp range between support and resistance but technical indicators generally take a back seat to important news like the Fed announcement. Currently bonds are trading lower on the news crude oil shed $5 a barrel which moved money out of bonds into stocks.

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Rainer
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Stefan Geyer
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I am pleased to be the first one to welcome you to Active Rain!  This is a great place to share information and leads; I wish you the very best!

Jun 25, 2008 08:48 AM #1
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Tom Horn
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Amber,

 

Great blog.  Keep it up!

Jun 25, 2008 09:14 AM #2
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Amber - Welcome to Active Rain and congrats on your first post.  Be sure to spend some time looking around at what and how others are blogging here.  It is a great education and a lot of fun.  Looks like you're off to a great start...keep it up!

Jun 25, 2008 09:18 AM #3
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Welcome to ActiveRain!

If you would like a few tips on getting the most out of ActiveRain, please visit my blog Welcome to Active Rain.  It has a few simple steps of what to do now that you have joined.

If you ever have any questions, just let me know.

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