The Federal Reserve’s $600 billion bond buying program ends at the end of this month. The program, which was the second round of quantitative easing for the central bank and has become known as QE2, has been controversial. So you are likely to read a lot of commentary over the next week or two about what it did and what it didn’t do, and how successful or unsuccessful the program was.
The Wall Street Journal has one of those stories today by John Hilsenrath, who is one of the most connected Fed reporters around. Some have accused him of being too connected. Nonetheless, I generally agree with Hilsenrath that QE2 is not to blame for rising oil prices.
Some of this criticism is likely overstated. Crude-oil prices hovered around $75 a barrel for a month after Fed Chairman Ben Bernanke made his QE intentions clear in an August 2010 speech in Jackson Hole, Wyo. Prices surged above $100 a barrel only after political turmoil erupted in the Middle East early this year.
The problem is the graph the editors include with the story does not jive with Hilsenrath’s facts.
As you can see in the left chart, oil prices spiked up at the end of the September and in the beginning of October just as QE2 was starting. From Ben Bernanke’s late August speech, which lit the fire of speculation about QE2, to mid-January, which was right before the riots started in Egypt, oil prices rose $18. Yes, a barrel of oil rose above $100 after the political turmoil in the Middle East, but that was after prices had already risen. From mid-January to mid-April when oil peaked, the price of crude was up another $25 a barrel. But on percentage terms the rise is about the same. So, just looking at oil price movements, I think it is fair to say that QE2 had at least an equal effect on oil prices as did the Arab Spring.
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James Hamilton, an economist professor and blogger, is an expert on oil prices. In the past he has concluded that QE2 did seem to have a meaningful impact on oil prices. He has said that the rise in commodities prices in general is something that the Fed should look at.
Of course, all of this analysis ignores one really big other factor: China. Demand from China and other emerging markets have significantly driven up the price of oil. And the economies of China and other developing countries were heating up late last year and in early 2011. More recently the central bank in China and other countries have been increasing interest rate to slow those economies. And now there are growing worries that China’s growth could slow. All that has happened in the past few months, and guess what oil prices have been falling since late April. That’s generally why I believe oil has risen and fell. Not because of QE2, but I can’t point to any data to prove that. You could say it is because of a long-term deficit of oil supply (we produce less than we use) but that’s not a problem that has come and gone in the past few months, and it’s not something that everyone wasn’t aware of back in September, when oil prices started to rise. So it can’t really explain the recent changes in price.
My point is this: There are a lot of things that move markets. Be cautious of any analysis that credits or blames QE2 alone with, say, a rise in oil prices or inflation in general. Saying what causes what in a global economy is a hard guessing game.