Is Fed Acting Cautious After Oil Prices Decline: A Quick Review


U.S. gas prices are the lowest that they have been since 2008. While this bodes well for consumers, most market analysts and the Federal Reserve are a little less hesitant to express enthusiasm. The big announcement by the Federal Reserve this week is expected to shed some light on how oil price are affecting the strategy and views for the coming year. There are a number of reasons that market analysts expect to see more caution in relation to the Federal Reserve’s statement on oil prices this week.

Delayed Rate Hikes

The speculation is that the Federal Reserve is going to delay the anticipated rate hikes because of the extremely low oil prices. The reason behind this is that falling crude oil prices reduces the chance of inflation, leading the consumer price index is the opposite direction that the Federal Reserve would like. Analysts are expecting the annual CPI to hit under 1.0% for the first two quarters of 2015. In light of low oil prices, allowing interest rate hikes would go against the policy that the Federal Reserve has set for itself. The two goals of the Federal Reserve to meet its objectives for monetary policy gains by ensuring maximum employment and stable prices. Increasing interest rates when oil prices are low will offset this policy because gains from low oil prices will be offset by spending on higher interest rates.


Another area of concern and caution for the Feds due to falling oil prices is inflation. The low oil prices have caused a strong downward pressure on inflation. This has led analysts to speculate that the Federal Reserve is going to adjust their short-term to medium-term projections for inflation. In addition, the FOMC is likely toing to strengthen its 2 percent inflation perspective, ultimately delaying the anticipated rate hikes for 2015. However, it also is possible that another major fluctuation in crude oil prices at the onset of 2015 will lead the Fed to curtail its current strategy.

Looking Ahead

While current oil prices have led to the Fed to exercise caution when it comes to rate hikes and inflation considerations, it doesn’t necessarily mean that investors won’t be able to expect a rate hike and inflation adjustments in the near future. The first quarter of 2015 is certainly off limits. However, current probability statistics from BVA Research point to a probable rate increase in either the second of third quarter of 2015. The expectations diminish during the fourth quarter of 2015 and especially the first quarter of 2016.

The Most Upcoming Impact

With expectations of a cautionary Federal Reserve towards oil prices, trading has also taken a reciprocal approach to the market. Traders and investors are currently uneasy about the upcoming Federal Reserve meeting this evening. The most obvious indicator of the unease is the VIX, or the volatility index. According to the NetoTrade application, uncertainty in the market jumped 15% since last night, which simply followed a 78% jump from last week.

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