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International concerns and low inflation leave Fed stance unchanged

Speculation continues to grow on when the Federal Reserve will raise its key interest rates as a release from today’s Federal Open Market Committee (FOMC) meeting indicated that rates would remain unchanged.

“To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate,” the FOMC said in a release.

The FOMC decided to stay the course amid low inflation and uncertainty in global markets. “Recent global economic and financial developments restrain economic activity somewhat and are likely to put further downward pressure on inflation in the near term,” the release said.

Unemployment fell to its lowest levels since April 2008, at 5.1% in August, according to the information released by the Fed. “On balance, labor market indicators show that underutilization of labor resources has diminished since early this year,” the FOMC said in its statement.

The FOMC also said in its statement that it “anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

The decision to maintain rates at historically low levels was not a unanimous one, with Jeffrey Lacker, president of the Richmond Federal Reserve Bank, voting to raise the federal funds rate by 25 basis points. This was the Fed’s first dissenting vote this year.

Market indicators had placed the chances of the Federal Reserve raising rates at around 30%, and EnerCom Analytics predicted in April that the Fed would likely maintain rates while uncertainty in the European market worked itself out, and employment rates continued to fluctuate.

“Based on labor indicators, the money supply and slow GDP growth, perhaps the Fed should leave well enough alone for now and consider waiting for the economic impacts of QE (quantitative easing) in Europe play out and unemployment rates come down further, or at least remain at current levels while the participation rates climb as more people begin to reenter the workforce,” EnerCom Analytics said in its Monthly Industry Trends Report for April, 2015.

Given the historic inverse relationship between the U.S. dollar and the price of U.S. benchmark oil WTI, a raise in rates could hurt oil prices, too, said EnerCom Analytics. “If the correlation between the U.S. dollar and WTI holds, we would likely see a scenario that includes longer-term suppression in oil pricing.” Given that relationship, “we are hoping the Fed holds off until economic indicators are truly robust,” the EnerCom Analytics Monthly Report said. Information about EnerCom Analytics’ Monthly Industry Trends Report may be requested via email here by typing ‘monthly’ in the subject line.

FED Interest Rates

What it means for oil

The decision to keep interest rates at their current levels was likely good news for oil prices, says EnerCom Analytics. Higher rates would mean a stronger dollar, likely sending down the price of dollar-denominated commodities like oil.

The low price of oil may be responsible for keeping inflation relatively low, as well. The producer price index has not pushed up inflation due to the stable cost associated with production. “There’s an underlying pressure for increased inflation, but until some of that shows through we will likely not see any action from the Fed to raise rates,” said EnerCom Analytics.

WTI settled down $0.25 from yesterday’s gains of 5.7%, closing 11 cents shy of $47. The fall in WTI prices was likely not directly correlated to the Fed’s decision to keep interest rates unchanged.

Adding a third mandate

While the Fed’s move to maintain current rates was not entirely unexpected, it was not the optimal outcome Art Hogan, director of equity research and chief market strategist for Wunderlich Securities, told Oil & Gas 360®.

In this undated photo released by Jefferies & Company, Inc., Art Hogan, chief market analyst at Jefferies & Co. in Boston, is shown. (AP Photo/ Jefferies & Company, Inc.) ** NO SALES **

Art Hogan, Wunderlich Securities

“I view this as a net negative for three reasons,” said Hogan. “First, it adds a layer of uncertainty, it firms up the dollar, and finally, we saw the Fed add a third mandate: stability in world markets.” The Committee’s two official mandates are to foster maximum employment and price stability.

“You can pick your flavor of the month,” said Hogan about events that might cause market instability. “There’s always going to be something going on in the world that you can point to as a reason to not raise rates.

“The concern now is, if we have another quarter like the first quarter of 2015, there’s nothing to give back if we don’t raise rates.” As the presidential election season approaches, it will become increasingly difficult for the Fed to make a change to rates, Hogan added.

“We’re focused particularly on China and emerging markets,” Yellen said at the news conference following today’s meeting. “We’ve long expected, as most analysts have, to see some slowing in Chinese growth over time as they rebalance their economy. The question is whether or not there might be a risk of a more abrupt slowdown than most analysts expect.”

“China’s economy has slowed for four straight years — from 10.6 percent in 2010 to 7.4 percent last year. The International Monetary Fund expects the Chinese economy to grow just 6.8 percent this year, slowest since 1990,” according to a report by the Chicago Tribune.

Another interesting decision to come out of today’s Fed meeting was an announcement from Federal Reserve Chair Janet Yellen that all future meetings would “be live,” meaning they could call a press conference after any meeting. Many analysts expected that a rate raise might come in December when the next scheduled press conference takes place, but now Yellen and Fed could make the decision about rates during any meeting, keeping everyone on their toes, including the markets.

Important disclosures: The information provided herein is believed to be reliable; however, EnerCom, Inc. makes no representation or warranty as to its completeness or accuracy. EnerCom’s conclusions are based upon information gathered from sources deemed to be reliable. This note is not intended as an offer or solicitation for the purchase or sale of any security or financial instrument of any company mentioned in this note. This note was prepared for general circulation and does not provide investment recommendations specific to individual investors. All readers of the note must make their own investment decisions based upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Investors should consider a company’s entire financial and operational structure in making any investment decisions. Past performance of any company discussed in this note should not be taken as an indication or guarantee of future results. EnerCom is a multi-disciplined management consulting services firm that regularly intends to seek business, or currently may be undertaking business, with companies covered on Oil & Gas 360®, and thereby seeks to receive compensation from these companies for its services. In addition, EnerCom, or its principals or employees, may have an economic interest in any of these companies. As a result, readers of EnerCom’s Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this note. EnerCom, or its principals or employees, may have an economic interest in any of the companies covered in this report or on Oil & Gas 360®. As a result, readers of EnerCom’s reports or Oil & Gas 360® should be aware that the firm may have a conflict of interest that could affect the objectivity of this report.