April 24, 2001

Here are a couple of news stories from 1999:

"Fed chief hints at rate rise, Greenspan signals need for 'pre-emptive' strike against inflation, June 17, 1999: 1:56 p.m. ET, NEW YORK (CNNfn) - Federal Reserve Chairman Alan Greenspan Thursday said the central bank needs to take "pre-emptive" steps to keep the economy growing with little inflation, in a sign the Fed may boost interest rates. 'While this stellar non-inflationary economic expansion still appears remarkably stress-free on the surface, there are developing imbalances that give us pause,' Greenspan told the Joint Economic Committee of the U.S. Congress."

"Bonds celebrate CPI, Omens of subdued inflation give bond market a lift, but dollar recoils, July 15, 1999: 9:25 a.m. ET, NEW YORK (CNNfn) - Bond prices surged early Thursday after the morning's supply of economic data showed a lack of inflation and continued breathing room for the labor market. Shortly before 9 a.m. ET, the bellwether 30-year Treasury bond rose 12/32 of a point in price to 91-4/32. The yield, which travels in the opposite direction, eased to 5.88 percent. Traders said consumer price index (CPI) and jobless claims reports released mid-morning were both benign, giving the once-gloomy bond market another burst of enthusiasm."

"Fed backed Aug [1999] hike 9-1, Minutes of Aug. 24 meeting also show most favored neutral bias, October 7, 1999: 3:34 p.m. ET, NEW YORK (CNNfn) - All but one of the Federal Reserve's voting governors was in favor of raising short-term interest rates in August at the Federal Open Market Committee meeting...As for inflation, which the Fed and Chairman Alan Greenspan have made clear they will keep at bay, 'the outlook for price inflation remained subject to considerable uncertainty, particularly the effects of rising prices for oil and other commodities,' the minutes said."

These three news stories are in reference to the beginning of the Federal Reserve Board's aggressive rate hikes. Starting June 30, 1999 the Fed raised the discount rate from 4.75% to 5.00%. At the next FOMC meeting on August 24, 1999 the Fed would raise the discount rate again from 5.00% to 5.25%. The price of crude in June of 1999 was $18 a barrel and it was $21 a barrel in August of 1999 (it costs about $18 a barrel to get it out of the ground).

The Fed would raise interest rates again on November 16, 1999 to 5.5% . At that time crude was $25 a barrel.

The Fed would raise interest rates again on February 2, 2000 to 5.75%. At that time crude was $29 a barrel.

The Fed would raise interest rates again on March 21, 2000 to 6.0%. At that time crude was $30 a barrel.

The Fed would raise interest rates again on May 16, 2000 to 6.5%. At the time crude was $29 a barrel.

In June of 1999 the fed raised interest rates stating they were concerned about inflation and they raised the interest rates the following month, again, stating they were concerned about inflation especially with regard to oil.

The Fed would raise interest rates a total of 6 times and would accomplish nothing as far as reducing the price of crude, even several months after the last rate hike and more than 18 months after the first rate hike, the price of crude would be $35 a barrel, it was $18 when the Fed made its first move in June of 1999.

Only after concerns for a global economic slowdown in December of 2000, did oil finally show a downward trend. In January of 2001 oil would be $30 a barrel.

Low and behold, the Fed raised rates in August of 1999 because of a fear of inflation especially with regard to oil that was $21 a barrel, but then on the 3rd of January, 2001 with oil at $30 a barrel, the Fed has an intra meeting cut in the discount rate of 1/2 percentage point.

Obviously, the Fed rate hikes had not gotten the Fed what they wanted in regards to a reduction in the price of crude, in fact, the hikes did exactly what the Fed didn't want: a severe global economic slowdown. The Fed was no longer concerned with the high price of oil.

This may be all hindsight, but it clearly shows that Fed policy needs to be changed with regard to how to fight rising energy costs. The Fed, the Politicians and the News Media, just writing it off as a "mistake," will only mean the same problem will continue to reoccur.

Right now the Fed is aggressively cutting rates and I am not challenging the rate cuts, what I'm challenging is I want to know what the Fed and the Politicians expect to do about the price of crude when at the same time they are aggressively cutting rates? Using the logic of the Fed, oil prices can only climb when the Federal Reserve is aggressively cutting rates (2 full percentage points in the last four months alone).

ADDENDUM (May 4, 2001)

"Friday May 4, 6:32 pm Eastern Time, Energy Could Be U.S. Economic Rebound Spoiler-Fed, By Barbara Hagenbaugh, RICHMOND, Va. (Reuters) - A sharp increase in energy prices could be the party pooper fora turnaround in the U.S. economy, two Federal Reserve officials said on Friday.

In separate appearances, Richmond Fed President Alfred Broaddus and Chicago Fed President Michael Moskow cited increasing costs for gasoline, natural gas and electricity as potential spoilers for the U.S. economy as it tries to climb out of the doldrums. 'The overall economy will respond to energy prices,' Moskow said after a speech at Valparaiso University in Indiana. 'Energy prices are a risk to the outlook going forward. It's clearly one of the downside risks at this point.'

Broaddus said energy prices will be a 'complicating factor over the next several months.' And in an interview with Reuters, Fed Governor Edward Kelley agreed that energy prices could damage consumer spending, which drives two-thirds of economic activity.

'I have a concern that, if we get a surge in energy costs as some economists are predicting this summer, that could have a negative impact on consumer expenditure stream that could be harmful,' Kelley said."

Price of Crude:

1998.09 14.950
1998.10 14.390
1998.11 12.850
1998.12 11.280
1999.01 12.470
1999.02 12.010
1999.03 14.660
1999.04 17.340
1999.05 17.750
1999.06 17.890
1999.07 20.070
1999.08 21.260
1999.09 23.880
1999.10 22.640
1999.11 24.970
1999.12 26.080
2000.01 27.180
2000.02 29.350
2000.03 29.890
2000.04 25.740
2000.05 28.780
2000.06 31.830
2000.07 29.770
2000.08 31.220
2000.09 33.880
2000.10 33.080
2000.11 34.400
2000.12 28.460
2001.01 29.580
2001.02 29.610
2001.03 27.240

Fed Interest Rate Increases:

Jun 30, 1999 (1/4 point to 5.00%)
Aug 24, 1999 (1/4 point to 5.25%)
Nov 16, 1999 (1/4 point to 5.50%)
Feb 2, 2000 (1/4 point to 5.75%)
Mar 21, 2000 (1/4 point to 6.00%)
May 16, 2000 (1/2 point to 6.50%)

GDP Numbers:

1Q 1998 (6.5%)
2Q 1998 (2.9%)
3Q 1999 (3.4%)
4Q 1998 (5.6%)
1Q 1999 (3.5%)
2Q 1999 (2.5%)
3Q 1999 (5.7%)
4Q 1999 (8.3%)
1Q 2000 (4.8%)
2Q 2000 (5.6%)
3Q 2000 (2.2%)
4Q 2000 (1.0%)

CPI:

1997 (1.7%)
1998 (1.6%)
1999 (2.7%)
2000 (3.4%)