Oil prices: Yes, Fed can be partly blamed for spike
The Federal Reserve isn't the only factor in recent rising oil prices, but it's at least partially responsible.
Jordan Weissman at The Atlantic denies that the Fed is responsible for the recent sharp increase in oil prices by asserting that the dollar has appreciated in value recently and is now stronger than before QE2 started.
His argument is wrong on many levels. First of all, I don't think anyone has claimed that the Fed is the only factor behind the recent increase. Inflationary policies by other central banks and of course the Iran issue have certainly also contributed to this, and that is not just my view but the view of most people who argue that the Fed is at least partly responsible.
Secondly, while it is true that the dollar has recovered from the lows of the summer of 2011, his contention that the dollar is stronger than before QE2 started is flat out wrong. In late August 2010, just before QE2 was announced, the dollar index was trading at around 83, while it closed at 78.4 this Friday, 5.5% lower. Weismann deliberately misleads his readers by ending his chart of the dollar index at the January peak of 82, despite the fact that his article was published yesterday, when the index was more than 4% lower.
Thirdly, and more important, he ignores the point that the contention of Fed critics isn't necessarily that the dollar is weaker than in the past, but that it is weaker than it would have been without the Fed's actions. There have been other factors counteracting the effects of Fed actions, most importantly the European debt crisis that has greatly increased demand for dollar assets because they are seen (irrationally) as a safe haven. If not for the Fed, the dollar's rally between August 2011 and mid-January 2012 would have been even greater, and its declines before and after would have been much smaller or wouldn't have happened at all.
In the end though, Weissman actually concedes that the exchange rate mechanism isn't the only way that the Fed can raise oil prices. However, he gets the story largely wrong. The other mechanism is simply that by increasing nominal demand, prices go up. And because oil and other commodities have perfect price flexibility, being traded at financial markets they will respond quicker than the more sticky prices that exist.
The Christian Science Monitor has assembled a diverse group of the best economy-related bloggers out there. Our guest bloggers are not employed or directed by the Monitor and the views expressed are the bloggers' own, as is responsibility for the content of their blogs. To contact us about a blogger, click here. This post originally ran on stefanmikarlsson.blogspot.com.