Fed Action May Signal End of Downturn
Thursday May 1, 2008
Federal Reserve Chairman Ben Bernanke Photo:Chip Somodevilla /Getty Images
The Federal Reserve is now less concerned about recession than it is about inflation. Since the Q1 GDP report was .6%, and not negative, the Fed's realizes it may not need to continue with expansionary monetary policy for much longer. (Source: FOMC statement, 4/30/08)
What It Means to You
The Fed's actions have helped to keep adjustable-rate mortgages affordable, although banks are still not willing to lend without FHA guarantees. Furthermore, the Federal tax rebate checks have been mailed, adding further stimulus to the economy. (For more about receiving your check, see The 2008 Tax Rebate Checks from Robert Longley, Guide to the U.S. Government).A lower Fed Funds rate puts downward pressure on the dollar, which increases inflation in imports, especially oil prices which are denominated in dollars.
Investors in the stock market are encouraged by the Fed's action. The Dow rose above 13,052, closing down to 12,820 after the FOMC announcement. On Thursday, the Dow again rose over 200 points as traders further digested the news.
Comments
Please note that while speculative futures trading may or may not link oil prices to the Fed’s rate-setting, the decline of the dollar does not in and of itself have any effect on rate of change in the real cost of oil. It might alter the dollar-denominated price, but what’s more important is that the real price of oil is rising at an alarming rate as the result of demand-driven oil shortages.
Most of my readers are more concerned about the dollar-denominated price of oil and gasoline than the real price. I think you raise an interesting point about the real price of oil, although first quarter oil use shows a decline in use and an increase in supply, not shortages…and yet the price keeps rising.