Oil near $100. Thanks a lot, Fed!August 23, 2012: 12:36 PM ET
The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, and Abbott Laboratories, La Monica does not own positions in any individual stocks.
Federal Reserve chairman Ben Bernanke may or may not give the market more hints about a possible third round of bond purchases at his speech in Jackson Hole next week. But investors are clearly betting on more quantitative easing or other forms of stimulus. Just look at what's going on in the commodity and currency markets.
The price of crude oil is getting dangerously close to $100 a barrel again. It hasn't been above that level since May. The euro has strengthened against the dollar as of late, partly due to hopes that the European Central Bank will step in and buy more Spanish bonds and also because of rising expectations for QE3. If the Fed turns on the printing presses so that Bernanke can take yet another helicopter ride, that could further weaken the dollar and push the prices of oil and other commodities higher.
Needless to say, that would not be good news for the U.S. economy. Many consumers are already growing increasingly nervous about the fact that gas prices are once again nearing $4 a gallon nationwide.
Rising energy prices are likely to be a hot topic of debate during the presidential campaign as well. Republican challenger Mitt Romney issued an energy plan Thursday that calls for more offshore drilling. Meanwhile, rumors that President Obama may tap the Strategic Petroleum Reserve in order to boost supplies and alleviate some gas price pressures just won't die.
But oil prices may keep climbing even if the White House steps in. That's because releasing oil from the SPR won't be enough to counteract the likely moves from the Fed.
Analysts for KilduffReport.com, an independent energy research firm, noted in a report Thursday morning that "the monetary easing from the Federal Reserve is coming" and that "regardless of your view on the effectiveness or necessity of further easing, the markets are highly reactive to the prospects for it." The upshot is that "inflation sensitive commodities" like oil and gold, which has also been on the rise lately, should continue to head higher.
That may make some traders happy. But it would be terrible news for consumers. Despite some encouraging signs of life in the housing market, consumer spending is still relatively sluggish and economic growth is expected to be modest at best for the rest of the year.
Throw in worries that Congress is going to close its eyes and take a flying leap off the fiscal cliff following the elections in November and you have yet one more reason why higher gas and oil prices are the last things consumers need right now.
Of course, we can't blame the spike in oil entirely on Bernanke and the Fed. There are legitimate worries about global oil supply due to the turmoil in Syria and Iran. Increased chatter of a possible Iranian-Israeli military conflict could lead to higher prices in the near-term.
Still, the Fed clearly seems to think that the economy needs more stimulus in the form of low long-term interest rates. And it's true that real inflation in the classic textbook sense is not a problem yet. But the Fed can't keep easing indefinitely. QE ∞ will eventually lead to inflation.
What's more, if the Fed really wants to try and solve the chronic problem of high unemployment, it may be shooting itself in the foot with more bond purchases. If companies are wary of hiring now, how are they going to feel if their energy costs keep climbing?
Make no mistake. A painful side effect of easing could very well be a return to $100 oil and $4 gas ... and that's just going to make the Fed's job even more difficult.