Oil prices are falling based on a more-passive-than-expected Fed? That's not a bug, that's a double feature.
First off, lower oil prices help everyone who doesn't own oil stocks or was long in oil futures. What's not to like there? Well, if you were a GOP operative who wants to hang high oil prices around BO's neck, you might be disappointed, but I don't think we need $4 gas to send him packing.
Secondly, having the Fed pass on what the wags were calling QE3 is a good sign. A third round of "quantititive easing" (finance wags made a nod to the Diamond Jubilee girl by christening the last round QE2) would merely have the Fed doing something about a sluggish economy; having hit a liquidity trap on short-term rates (once you take the Fed Funds rate down to near-zero, that monetary policy bullet has been shot), the Fed has tried to spur investment by lowering long-term rates via buying up Treasury bonds rather than T-bills.
Sounds good on paper, but it puts the Fed's balance sheet at risk, since they're buying bonds when rates are at rock-bottom, any move upward will put the money supply at risk, since it's all those T-bill and T-bonds, rather than gold, that are by-and-large backing up the dollar. A spike in long-term rates will make those T-bonds worth less and put the Fed in an awkward spot where it might lose money rather than make money off the interest it gets on all those securities.
Thus, the Fed passing on a QE3 is a good thing; the drop in oil prices might be signaling a worry about a second recession driving the demand for oil down or (more positively) seeing less inflationary pressures in the absence of a QE3
Keep the greedy oil prices dowen at ALL costs.
Posted by: alan | June 21, 2012 at 12:48 PM