The Atlanta Fed's macroblog provides commentary and analysis on economic topics including monetary policy, macroeconomic developments, inflation, labor economics, and financial issues.
- BLS Handbook of Methods
- Bureau of Economic Analysis
- Bureau of Labor Statistics
- Congressional Budget Office
- Economic Data - FRED® II, St. Louis Fed
- Office of Management and Budget
- Statistics: Releases and Historical Data, Board of Governors
- U.S. Census Bureau Economic Programs
- White House Economic Statistics Briefing Room
May 11, 2006
Oil Or Money?
This comes from David Wessel, in today's Wall Street Journal (page A3 in the print edition):
So far, the global economy and the U.S. economy, in particular, are shrugging off higher oil prices. The latest forecasts, most of which assume oil prices will fall a bit from current levels, predict reasonably strong economic growth for the rest of the year...
But a lot turns on the response of the U.S. Federal Reserve and other central banks. History demonstrates that a sharp increase in oil prices is economically toxic when accompanied by a sharp increase in short-term interest rates. Fed Chairman Ben Bernanke knows his history and vows to avoid repeating it.
Below is a picture I (and many others) have shown before. The arrows represent episodes in which the relative price of energy -- the energy component of the consumer price index divided by the price index for all other goods and services -- increased by at least 10%. The shaded bars represent NBER recession dates.
Here is a similar picture, with the federal funds rate substituted for the energy price series. (The arrows are preserved for reference):
Hmmm. Sure enough, every energy-price spike has a downturn in the economy in the near temporal vicinity. But every energy-price spike is likewise associated with a run up in the funds rate.
Should we be worried? Wessel continues:
"The crucial difference from the 1970s, in my view, is that today, inflation expectations are low and stable," Mr. Bernanke said. "As a result, the Fed has not had to raise interest rates sharply as it did in the 1970s." The key to keeping inflation expectations "benign," he argued, has been "Fed policies that have kept actual inflation low in recent years, clear communication of those policies, and an institutional commitment to price stability."
That does leave the 1990-91 and 2001 episodes sort of hanging there. Nevertheless:
So if we all believe higher oil prices won't spark inflation, the Fed won't have to raise interest rates so much to squelch inflation. If the Fed doesn't raise rates too much, the slow-motion supply shock won't provoke a slow-motion recession. Let's hope.
TrackBack URL for this entry:
Listed below are links to blogs that reference Oil Or Money? :
- GDPNow's Forecast: Why Did It Spike Recently?
- How Low Is the Unemployment Rate, Really?
- What Businesses Said about Tax Reform
- Financial Regulation: Fit for New Technologies?
- Is Macroprudential Supervision Ready for the Future?
- Labor Supply Constraints and Health Problems in Rural America
- Building a Better Model: Introducing Changes to GDPNow
- How Ill a Wind? Hurricanes' Impacts on Employment and Earnings
- When Health Insurance and Its Financial Cushion Disappear
- What Is the "Right" Policy Rate?
- February 2018
- January 2018
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- May 2017
- April 2017
- March 2017
- Business Cycles
- Business Inflation Expectations
- Capital and Investment
- Capital Markets
- Data Releases
- Economic conditions
- Economic Growth and Development
- Exchange Rates and the Dollar
- Fed Funds Futures
- Federal Debt and Deficits
- Federal Reserve and Monetary Policy
- Financial System
- Fiscal Policy
- Health Care
- Inflation Expectations
- Interest Rates
- Labor Markets
- Latin America/South America
- Monetary Policy
- Money Markets
- Real Estate
- Saving, Capital, and Investment
- Small Business
- Social Security
- This, That, and the Other
- Trade Deficit
- Wage Growth