No Love For Oil From the Federal Reserve

Mandate of Heaven Congress

The Federal Reserve, under the dual mandate, is instructed by the US Congress to control both inflation and unemployment.  For the past few years, the Fed has stated that inflation must remain near their 2% target for the US economy to remain healthy.

Core Principles

One of the most popular measures of US inflation, the main index of the Consumer Price Index (CPI), went negative earlier this year and is now around .4%.  However, that is not the index that the Fed uses.  The Fed considers commodities to be too volatile and instead monitors “Core Inflation“.

CPI 10yr
The year-over-year percent change in the CPI for the past ten years. (Source: Federal Reserve Economic Data)

Up and Down

There are many CPI series – 4,609 to be exact.  However, it is the CPI: Less Food and Energy that the Fed monitors.  That index is now above 2% for the first time since February 2013.  That explains why oil prices did not and will not factor into the Fed’s decision to raise the prime rate.

640
Oil production volume appears to have reached a peak – nearly the same peak level from the 1970’s. (Source: Energy Information Administration)

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