Oil Prices and Interest Rates

It was a very interesting time for a meeting of the Federal Reserve Board's Open Market Committee. As we discussed the past few weeks, the increased pace of job growth will cause the economy to expand more quickly and this will make it easier for the Fed to make a decision to raise rates more quickly. On the other hand, there are other factors in play. For example, many world economies are slowing significantly. Our economy is intertwined with the global economy and the Fed must worry whether this slowdown might affect our strengthening recovery.

Oil prices represent another wild card. The magnitude of the drop in the price of oil has been absolutely stunning. The move from $110 per barrel in August of 2013 to less than $60 per barrel by the middle of December represents a decrease of around 50% in a little over a year. Lower oil prices are also good for the economy because of the potential for reduced consumer inflation. This reduced inflationary pressure enables the Fed to be less inclined to raise interest rates.

Not all of the effects of lower priced oil are positive. The energy sector is a significant industry and if the price of oil stays too low, we could lose jobs within this sector. For example, the jobs created in the oil shale industry may be lost if it is not cost effective to extract oil from shale. And going back to the global focus, major nations such as Russia depend upon revenues from oil and their situation is potentially much graver than ours. Of course, the oil factor also influences the thinking of the Fed with regard to rates and when the announcement was made on Wednesday, there was a sense that the Fed wanted to calm the markets somewhat with the use of words such as "patience." If that means continued low rates with low oil prices, we say Happy Holiday!

Mike Ervin
Branch Manager/Mortgage Banker
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