How Federal Reserve Policies Add to Hard Times at the Pump

Thank you, Chairman Jordan and other members of the subcommittee, for the opportunity to discuss monetary policy and the price of oil. I believe that it is an appropriate use of the subcommittee's time to examine that connection. Indeed, both the net rise and the volatility of oil prices over the past nine months are partly a predictable byproduct of the Fed's expansion of its balance sheet in its policy known as quantitative easing (QE). The Fed gambled that the benefits of the stimulus of QE to financial markets would offset the adverse effects of oil price developments. Whether that gamble pays off is yet to be proven.

QE was essentially designed to give a nudge to risk taking. Late last year, Fed officials announced they would purchase $600 billion of risk less Treasury securities over the period from November 2010 to June 2011. The hope was that investors would reinvest the proceeds in riskier assets. The resulting lift to equity prices and decline in corporate rates would, the theory runs, support economic expansion. The nudge to risk taking from QE seemed like mission accomplished for a time. Stock prices moved significantly higher and yield spreads narrowed once QE was seen as inevitable.

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Vince Reinhart is a resident scholar at AEI.

 

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About the Author

 

Vincent R.
Reinhart
  • Vincent Reinhart, a former director of the Federal Reserve Board's Division of Monetary Affairs, joined AEI in 2008 after working on domestic and international aspects of U.S. monetary policy at the Fed for more than two decades. He held a number of senior positions in the Divisions of Monetary Affairs and International Finance and served for the last six years of his Federal Reserve career as secretary and economist of the Federal Open Market Committee. Mr. Reinhart worked on topics as varied as economic bubbles and the conduct of monetary policy, auctions of U.S. Treasury securities, alternative strategies for monetary policy, and the efficient communication of monetary policy decisions. At AEI, he has continued his work on all of the above in addition to research on key economic variables before and after adverse global and country-specific shocks, policy mistakes leading to the 2007-09 financial meltdown, and the implementation and impact of quantitative easing.
  • Email: vincent.reinhart@aei.org

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