Tuesday, September 20, 2005

FOMC Rushes Headlong Towards Recession

FOMC raised interest rates for the 11th consecutive time, apparently oblivious to energy costs spiraling out of control. (Reuters: Fed raises U.S. rates, one voter dissents). Historically, the Fed manipulates interest rates in an attempt to maintain control over the rate of inflation. Under normal circumstances, this policy is relatively successful. In this case, however, it is more likely to have a detrimental impact on the economy as a whole.

The price of energy has more than doubled in the past year with oil frequently topping $67 per barrel. Rising energy costs impact every aspect of the economy are are always associated with increased inflation. When you look back on every recession we've had since 1970, they all have one common denominator. They were ALL caused by rising energy prices, including the 1974 post-Watergate recession that was caused by the Arab oil embargo.

Increasing the cost of money at the same time the cost of energy is skyrocketing is foolhardy at best. In their statement today, FOMC cited the impact of Hurricane Katrina as being a temporary setback to the broad economy, and signaled further rate increases on the horizon. They have clearly missed the larger picture of outrageous oil prices - a lack of vision that has plagued the entire tenure of Alan Greenspan. He missed the same signals in causing the post Gulf War recession, and also failed to recognize the impact of energy costs when he caused the post Y2K recession. In each case, he lead FOMC into a series of ill advised interest rate hikes that stalled any hope of economic growth.

Greenspan's tenure cannot end soon enough. Let's hope that his successor is capable of learning from history. Let's hope his successor is able to factor in the cost of energy when formulating economic policy. These self-induced recessions are avoidable with proper management. That is something that's been sorely lacking throughout Greenspan's reign.


1 comment :

scott said...

Interesting post. Perhaps some good will ome out of this. We haven't built a new refinery in 15 years and we built most of them in the Gulf.

Here's the link: