Fed cites oil prices in US interest rate decision

OREANDA-NEWS. February 03, 2016. The Federal Reserve is citing recent crude oil price declines among factors preventing further interest rate increases following their modest rise in December.

The Fed's reluctance to follow up on the December increase in the federal funds rate should be welcome news to US shale producers, many of which have loaded their balance sheets with debt.

The Fed is building its monetary policy around a long-term inflation objective of 2pc. US consumer prices have been increasing below that target rate, and recent declines in oil prices and rising strength of the dollar suggest that it could take longer than expected for the 2pc target to be attained, Federal Reserve vice chairman Stanley Fischer said today.

The Fed also is concerned about the global outlook, including structural adjustments in China and the effect of the decline in oil prices on commodity exporting nations, Fischer told the Council on Foreign Relations in New York.

A potential slowdown in the global economy as a result of those developments could affect US economic growth and inflation. "But we have seen similar periods of volatility in recent years that have left little permanent imprint on the economy," Fischer said. US labor market conditions continue to strengthen, he said. The Fed expects the effects of the oil price decline on the US inflation rate will dissipate.

The Fed on 16 December set a target range for the federal funds rate of 0.25 to 0.5pc and indicated a strong possibility of further increases in 2016. But the Fed struck a more cautious tone on 27 January, holding the rate unchanged and citing global economic and financial developments.

US GDP in the fourth quarter increased at an estimated annual pace of 0.7pc, slowing down from a 2pc annualized increase in the third quarter, according to the Bureau of Economic Analysis. Declining investment and activity in the oil and natural gas industry is among many factors slowing down the economic growth.

The share of the US oil and gas extraction industry in GDP dropped to 0.9pc in the third quarter of 2015, from 1.8pc a year earlier. The decline reflects the decrease in oil prices, as production volumes continued to rise in that period.