Full Title: Federal Reserve Board Policy and the Price of Oil
Author(s): Dean Baker
Publisher(s): Center for Economic and Policy Research
Publication Date: May 1, 2011
Full Text: Download Resource
Description (excerpt):
Thank you, Chairman Jordan, Ranking Member Kucinich, and other members of the Subcommittee, for the opportunity to testify before you on the effect of the Federal Reserve’s quantitative easing policy on the price of gasoline. I will make three main points in my testimony:
1) The main channel through which the quantitative easing policy could affect the price of gas is by lowering the value of the dollar. The decline in the dollar has been modest since this policy began, and most of it just reversed the run up since bursting of the bubble. The decline in the value of the dollar can at most just explain a small share of the increase in the price of gas.
2) The dollar is over-valued at present. A decline in the value of the dollar is necessary to bring down our trade deficit. Such a decline is beneficial in the short-run because it means more net exports and therefore more jobs. It is also beneficial in the long-run since it will mean less borrowing from abroad.
3) The main factors behind the increase in the price of oil have nothing to do with Fed policy. Rapidly growing developing countries like China are causing the growth in demand to exceed the growth in supply. Instability in the Middle East has also created uncertainty in the market, thereby pushing prices upward. Finally, there is undoubtedly considerable speculation in this market that has likely exaggerated the upward movement in prices.