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Why the Fed won't be bothered by oil prices: Morning Brief

Myles Udland
Markets Reporter

Wednesday, September 18, 2019

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One chart explains it all

On Monday, crude oil prices rose 14.7% following an attack on a major Saudi oil facility over the weekend. This marked the largest single-day increase for crude prices since December 2008.

And while a destabilization in the energy market changes the global economic outlook, it will not lead to the Federal Reserve materially changing its policy outlook.

Partly because any inflation spike due to gas prices is removed from the Fed’s preferred inflation measure, and partly because changes in the price of gas simply matter less to consumers than they used to.

A whole lot less.

Gasoline spending as a share of total personal consumption has been sliding for decades, dampening the negative impact to consumers from spikes in the price of oil. (Source: BAML)

“Consumption of gasoline, fuel oil and other energy goods as a share of total consumption has fallen from around 8% before the 1970s to around 2.3% today,” economists at Bank of America Merrill Lynch wrote in a note published this week.

And with personal consumption accounting for about 70% of GDP, a 75% reduction in the relative importance of gasoline prices to this measure means that sticker shock at the pump just isn’t a major risk to the U.S. economy. Even if it does lead to a slight downtick in overall consumption.

My colleague Ethan Wolff-Mann noted Tuesday that all economists have two hands — higher oil prices can be both good and bad for the economy. Because even if a negative shock from high oil prices hits consumption, higher prices should lead to increased investment from energy companies to pump more oil.

Goldman Sachs economists said this week the drag on growth from any consumer pullback should “slightly exceed” the boost to business investment from higher oil prices. And by “slightly exceed” Goldman means a $10/barrel increase in oil prices would likely result in a 0.15% reduction in GDP due to lower consumption and a resulting 0.12% increase in GDP due to higher investment.

The resulting 0.03% hit to overall GDP is also known as a rounding error.

So, while Deutsche Bank economists led by Matthew Luzzetti wrote this week that the latest events in the oil market “should reinforce the Fed’s already dovish bias,” strong retail sales data from August and a decent August jobs report should do the same.

After all, Fed Chair Jay Powell began telegraphing this easing cycle back in January by saying the central bank would use its tools to “keep the expansion on track.”

And working to keep this expansion on track means acting to bolster a solid labor market and confident consumers amid a muddied global economic picture, with or without oil price shocks. Shocks that likely won’t matter much anyway.

By Myles Udland, reporter and co-anchor of The Final Round. Follow him @MylesUdland

What to watch today

Earnings

  • 7 a.m. ET: General Mills (GIS) is expected to report adjusted earnings of 77 cents per share on $4.09 billion in revenue.

Economy

  • 7 a.m. ET: MBA Mortgage Applications, week ended September 13 (2.0% prior)

  • 8:30 a.m. ET: Building Permits, August (1.307 million expected, 1.317 million in July revised); Housing Starts, August (1.250 million expected, 1.191 million in July)

  • 2 p.m. ET: FOMC Rate Decision

From Yahoo Finance

  • The Federal Open Market Committee (FOMC) will deliver its rate decision at 2 p.m. ET. Watch Yahoo Finance from 9 a.m. to 5 p.m. for complete coverage of the decision.

  • Netflix (NFLX) co-founder Marc Randolph will be on YFI PM, which starts at 1 p.m. ET.

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