Oil responds as Fed signals for exit

Fed Up With High Oil Prices!

Are you Fed up with high oil prices? Well maybe we can talk about the possibility of prices coming down because we are starting to talk about an "exit strategy." No, I am not talking about Libya, but the Federal Reserve policy of quantitative easing. Perhaps the Fed is fed up with high oil and commodity prices as they may start to address the most bullish influence on the price of oil for the last couple of years.

I am not talking about speculators. What I am talking about is Fed policy of printing money that has set the stage for the historic commodity price inflation that we have seen. While the woefully uninformed look to blame speculation for the run up in price of oil and many other commodities, the truth is we have had some of the most bullish fundamentals for the price of a barrel of oil that we have ever had. Printed money and a global economy that is so infused with artificial stimulus that helped create a historic demand surge led by the developing world in a classic case of too many dollars chasing too few goods. Now add to that a war in an important OPEC producer and unrest throughout North Africa and the Middle East, I can't imagine why anyone is surprised that oil prices are where they are.

After surging for most of the week, gold and silver seemed to reverse course as it is possible that the Fed is laying the ground work to reverse its wildly inflationary quantitative easing policy. Oil prices might have fallen further if it were not for the perception of great risk going into the weekend.

The first sign that the Fed was thinking about backing away from the most amount of stimulus that has ever been thrown at the US economy were comments from Chicago Federal Reserve President Charles Evans. Mr. Evans, who is considered to be a big backer of quantitative easing, seemed to suggest that while the Fed should continue following through on its $600 billion bond buying spree, recent strong economic data might suggest that perhaps no more QE will be needed.

Next up was Federal Reserve Bank of Dallas President Richard W. Fisher who said that the Fed will complete the $600 billion QE2 Treasury buying and he also said he is worried about inflation. As far as QE2, he said the Fed has done enough and risks doing too much. In fact he also said he wants to drop the Fed's mandate for achieving full employment.

Philadelphia Federal Reserve Bank President Charles Plosser seemed to take it a step further, almost suggesting that the completion of QE2 might not even be necessary. He said that the Fed may have to reverse its easy money policies in the not too distant future. In fact Mr. Plosser, unlike the woefully uninformed critics of speculation, seems to get it when he said, "What creates inflation is monetary policy at the end of the day."

I say so at the end of the day and at the beginning of the day! He went on to say that what worries him about these rising energy prices is that it will increase pressure on the Fed and other central banks to keep this monetary policy longer as these price gains will hold back economic growth by reducing spending power. That response will in my view create inflation, and we need to lean against that.

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