James Picerno, who in my estimation is the go-to blogger on all things oil, has checked in on Chairman Greenspan's speech on the course of energy prices, delivered Tuesday. He suggests that, just maybe, the Fed is not blameless.
... In fact, the point where a central bank's punch is most potent in the energy realm is found within the arcane art of monetary policy, and on that score there are some who find reason to fault Greenspan.
There is, after all, a closely entangled relationship between the price of a barrel of crude and the dollar. Oil is a global commodity that's priced globally in dollars. That means that even a purchaser of oil who holds euros, yen or some other form of government paper is bound by the prevailing dollar exchange rate. As for dollar-based buyers of oil, forex may seem an irrelevancy, since oil's priced in greenbacks, but that's an erroneous assumption of no insignificant magnitude.
Consider the price changes in a barrel of crude (measured by the spot price on the New York Mercantile Exchange) in dollar terms vs. euro terms. Assuming a current price of $55 a barrel in the here and now, oil's up more than 200% from December 2002, James Williams of WTRG Economics tells CS. Now the kicker: in euro terms, oil's up 59% over that stretch.
That says to me that the level of U.S. dependence on imported oil exceeds that of the euro zone countries, meaning that the real terms of trade -- essentially the value of what we import relative to what we export -- have turned to the disfavor of the U.S. economy. But James may have more than that in mind.
Mr. Greenspan can speak all he wants of supply and demand and the wisdom of markets. But at the end of the day, the most powerful tool at his disposal in the war to help the United States manage energy costs to the benefit of the American consumer is to do as much as possible to preserve the value of the buck. Of course, he should be doing no less even if oil was $10 a barrel. But to judge by recent trends in the formerly mighty buck, the maestro's stumbled. Or has he? True, some if not most of the pressures on the dollar are beyond his control. The government's fiscal deficit, to cite an obvious example, is a byproduct of Congress and the White House.
All the more reason for the Fed to do what it can to succeed within its relatively narrow purview of protecting the dollar.
One small point of order. Exchange rate policy in the United States is in the hands of the Treasury, not the Federal Reserve. In the absence of a formal exchange rate policy endorsed by the government, it is best to think of the role of the Fed in the context of the goals that are specifically within the central bank's mandate.
What might that mandate be? It boils down to this, if you ask me: Price stability or, if you like, a low and stable rate of inflation. As it relates to movements in the value of the dollar, this ultimately means maintaining the expectation of low and stable inflation.
In my view, we have not seen much significant deterioration in private expectations of inflation over the longer haul, or any significant change in the inflation differentials expected in the US relative to other countries (including the euro). I'd say that "within its relatively narrow purview of protecting the dollar," that's the Fed doing its part.