Oil, Inflation and Interest Rates

Yet another interest rate hike last week. More bad news on the price of oil -- if you hadn't already noticed at the gas pump. Guess what high oil prices mean? Inflation. And if inflation continues to be a threat to our economy (despite the fact of our economy's incredible resilience of late), the Fed will keep raising interest rates.

And that means more pressure on mortgage rates.

I have to say: I'm getting a bit "fed" up. (Pun intended.) Is there no other reasonable response to inflation other than raising interest rates? Couldn't the US government work in concert with the Federal Reserve? After all, "Dubya" has been following a policy of tax cuts, and tax cuts are inflationary! Meanwhile the Fed is raising interest rates. Does that make sense? Maybe we could pay a bit of tax, get our huge national debt under control ("Dubya" could consider the Oprah debt diet for the government), and perhaps keep inflation damped down a bit that way? After all, an economy is affected by multiple economic forces. Why should our response to that be single dimensional?

Not only are we at the mercy of the Fed and our government when it comes to interest rates, we're also at the mercy of the stock market. One of the main reasons that oil is going up right now is global "political instability". That makes investors in the market nervous. Nervous investors will drive up the price of key commodities -- like oil. So here we are staring at new highs for a barrel of oil, and no immediate threat to oil production. But there is a lot afoot with Korean missile testing and Iranian issues, so traders drive up the price.

It will be some fun if we end up with a nasty hurricane in the Gulf again this year.

Michael

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