Tags: Fed | Bullard | Oil | Prices

Bullard: Oil Prices Should Fuel Fed's Monetary Policy

Thursday, 17 Nov 2011 08:32 AM

Rising oil prices are a concern and should be considered when making monetary policy decisions going forward, says Federal Reserve Bank of St. Louis President James B. Bullard.

Oil prices recently broke $100 a barrel and could continue rising, as investors are betting a stronger U.S. economy will need more fuel to motor its growth.

"The story that we've been telling is that commodity prices peaked in the spring. And they come off those peaks and, therefore, we expect inflation to move back down toward our inflation target. But now with commodity prices going back up, that's putting that story in jeopardy," Bullard tells CNBC.
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Federal Reserve officials often make monetary policy decisions — rate hikes or rate cuts — based on what core inflation does, and less on headline inflation rates, the broader number.

Core inflation rates are stripped of volatile food and energy prices.

oilrig200ap.jpg
(Associated Press photo)
The time, however, may have come to factor those volatile prices in when making deciding policy, Bullard says.

"I think there was a time between the late '80s and about 2003 when it made sense to look at core inflation because oil prices and other commodity prices tended to just randomly fluctuate, but since 2003, you have a secular trend in commodity prices. You've got a global scramble for resources. So I think it's — it's prudent now to always be looking at the headline number."

Market watchers, meanwhile, aren't expecting oil prices to ease any time soon.

"The market should oscillate around $100 for a while," says Jonathan Barratt, a managing director of Commodity Broking Services in Sydney, adding he sees a breather coming when prices hit $102, Bloomberg reports.

Concerns that the European debt crisis will threaten global growth could cool the rally.

"Overhanging the market is the concern that this contagion in Europe will continue to flare up."

The U.S. is the world’s largest oil consumer, using 19.1 million barrels a day in 2010, or 21 percent of global demand, according to BP Plc’s annual Statistical Review, Bloomberg adds.

The European Union consumed 16 percent.

For Bullard, European debt fears haven't seriously bruised the U.S. economy.

The economy should grow around 2.5 percent for the second half of 2011 and will come in stronger in 2012, probably between 3 percent and 3.5 percent.

"I think the lesson here is that the decline in business and consumer confidence that we saw during August and September was not of a nature that would cause the U.S. economy to really tumble. Europe is too far away from the American household to get them to cancel the Disney World trip," Bullard says.

"That's really the guts of it, right? So they will not pull back from their ordinary activities just because they're getting a lot of headlines about something going on in Italy or France."

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Rising oil prices are a concern and should be considered when making monetary policy decisions going forward, says Federal Reserve Bank of St. Louis President James B. Bullard. Oil prices recently broke $100 a barrel and could continue rising, as investors are betting a...
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2011-32-17
Thursday, 17 Nov 2011 08:32 AM
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