Friday, January 4, 2008

Is Oil Helping Bernanke & Co.?

Typically the Fed raises rates in order to slow growth in an effort to curb inflation. Are $100 a barrel oil (USO) prices doing that for them?

The Fed released the minutes from their last meeting Wednesday. While the market interpreted that last statement from them to mean the Fed was equally concerned about inflation and growth, today's minutes would appear to say the Fed is more worried about growth. From the release:

"The Committee agreed that the statement to be released after this meeting should indicate that economic growth appeared to be slowing, reflecting the intensification
of the housing correction and some softening in business and consumer spending, and that strains in financial markets had increased. The characterization of the inflation situation could be largely unchanged from that of the previous meeting.

Members agreed that the resurgence of financial stresses in November had increased uncertainty about the outlook. Given the heightened uncertainty, the Committee decided to refrain from providing an explicit assessment of the balance of risks. The Committee agreed on the need to remain exceptionally alert to economic and financial
developments and their effects on the outlook, and members would be prepared to adjust the stance of monetary policy if prospects for economic growth or inflation were to worsen."

Now, there is a saying on Wall St. that "nothing cures high prices like high prices". The simple explanation of that is that as prices climb, demand decreases. As milk climbs to $5 a gallon, people buy less of it sand the price falls. As oil climbs to and then past $100 a barrel, people will decrease gas use and the use of products that are affected by the price of oil. That will slow the economy and that slowdown ought to crimp inflation that seemed to rise in December.

We have seen this begin to happen and gasoline demand has actually fallen recently and this holiday shopping season was less than spectacular.

If that is the thinking of the Fed, then they are free to lower rates at the next meeting to meet credit and liquidity concerns of banks like Bank of America (BAC) and Wells Fargo (WFC) and businesses and to ease the burden on home owners and consumers with credit cards.

Oil may be doing 1/2 the Fed's job and for a short time it may enable the Fed to ease rates without increasing in inflation fears.


Disclosure: Long Oil (USO)

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