Oil prices up again
Oil prices edged higher today, continuing a two-week run-up that has pushed the commodity back over $73 a barrel.
In midmorning trading at the New York Mercantile Exchange, the contract for light sweet crude for August delivery was up a couple of cents to $73.54. John Felmy, economist at the American Petroleum Institute, says that yesterday's strong first-quarter GDP report of 5.6 percent–up from an initial estimate of 5.3 percent–was another sign that a robust economy will likely continue to support high demand–and high prices.
"That GDP number really had an impact on prices," he says. "So you have that and now the lead-in to the summer driving season" to support prices.
And if oil market bears were hoping for some help on the demand side–perhaps a sharp slowdown in the U.S. economy–from the Federal Reserve, it appeared not to do them any favors yesterday. While the Fed's Open Market Committee did announced a quarter-point hike in the federal funds rate to 5.25 percent, many analysts interpreted the language in its policy statement as signaling a less hawkish view on inflation–and perhaps the denouement of its tightening cycle. Any further hikes, the Fed said, "will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information."
As Oak Associates economist Edward Yardeni interprets the statement, "This is much more reasonable than the barrage of recent Fedspeak describing inflation as 'unwelcome,' 'beyond acceptable,' 'corrosive,' and 'unhinged.'"
The more tactful language was enough to send the Dow Jones industrial average up 217 points yesterday, its biggest one-day point gain in more than three years. In trading today, stocks were flat and seemed to be holding onto the big gains. Still, between higher energy prices and 17 Fed rates hikes, the economy already seems to be slowing a bit. According to a Commerce Department report out this morning, consumer spending slowed sharply in May, rising by just 0.4 percent last month after a 0.7 percent gain in April. Income growth also slowed last month, rising just 0.3 percent vs. 0.6 percent in April.
Indeed, Peter Morici, a business professor and former chief economist at the U.S. International Trade Commission, says the new data provide more reason why the Fed should stop raising rates.
"With the savings rate so low, it would not take much of a further upward movement in interest rates, especially housing mortgage costs . . . to cause a radical adjustment in consumer behavior," he explains. "International oil and resource markets will continue to instigate inflationary pressures, and these can be little affected by Fed policy. If it chooses to raise interest rates further, the Fed will do little to curb inflation but risks throwing the economy into recession and stagflation."