Fed Welcomes Lower Energy That Could Boost Productivity

The Federal Reserve is welcoming the sharp drop in global energy prices, with two influential policymakers on Monday cheering the boost it should provide American pocketbooks and shrugging off any pressure on already low inflation.

Soft oil prices in particular, which hit a five-year low on Friday, will only temporarily dampen overall U.S. prices, Fed Vice Chairman Stanley Fischer and New York Fed President William Dudley said at separate events. The pair painted a mostly rosy outlook for the world’s largest economy, suggesting the central bank is not letting energy markets distract it from lifting rates some time next year.

“The lower inflation that we’ll get from the lower price of oil is going to be temporary,” Fischer said at the Council on Foreign Relations. “I wouldn’t worry about that very much because that period of negative, low inflation is actually happening as a result of a phenomenon that’s making everyone better off, and furthermore likely to increase GDP rather than reduce it.”

Dudley, who like Fischer is a close ally of Fed Chair Janet Yellen, said the oil rout was a positive for the economy because much of the extra money will be “spent, not saved” by Americans. The global price drop will also encourage more monetary easing by other central banks, spurring global growth, he said.

If the oil price drop were to “intensify and persist, this would have negative implications for oil and gas investment” in the United States, he added. “Nevertheless, there are several reasons why I don’t think this risk should be overstated, especially if oil prices stabilize around current levels.”

via Reuters

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza