Financial Update (Fourth Quarter 2004)



FEATURES

 Appraisal Reviews
 Maintain Soundness

 GLBA Spurs
 Banks’ Insurance
 Activities

 Conference Focuses
 on Remittances

 New Fed
 Brochures About
 Check 21

 Fed Distributes
 Redesigned $50s

 Atlanta Fed Chair,
 Vice Chair
 Reappointed

 Will Privacy
 Concerns Prolong
 Cash Use?

 Fed Governor
 Sees Oil Prices
 Staying High

 Greenspan on
 Challenges of
 Aging Population

 Helping Consumers
 Avoid Overdrafts

 Examining Fannie
 Mae and
 Freddie Mac

DEPARTMENTS

 Data Bank

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Fed Governor Foresees Oil Prices Staying High

Constrained production capacity and rising worldwide demand will combine to keep oil prices high, according to Ben Bernanke, a member of the Federal Reserve System’s Board of Governors. However, the long-term effects of high prices will be manageable, he noted, and as long as core inflation remains low, the Fed’s gradual removal of an accommodative monetary policy can proceed.

Making the adjustments
“Conservation and the development of alternative energy sources will, over the long term, take some sting out of higher oil prices,” he said in an October speech in Albany, Ga. “Moreover, productivity gains from diverse sources, including technological improvements and a more highly educated workforce, are likely to exceed by a significant margin the productivity losses created by high oil prices.”

Related
Speech by Gov. Bernanke
Speech by Chairman Greenspan

Bernanke also pointed out a possible bright side to higher oil prices. For instance, he said, increased oil prices might cause companies to invest in more energy-efficient buildings and equipment, mitigating the decline in many companies’ capital spending over the past several years. In addition, if high oil prices are in part caused by heightened demand spurred by worldwide economic growth, or if overseas oil suppliers spend some of their increased revenue on U.S. products, U.S. exports could benefit.

Accomplishing monetary policy goals
For monetary policymakers, high oil prices present a short-term challenge, Bernanke said, because increased petroleum costs slow economic growth and increase inflationary pressure. (This observation was also made by Fed Chairman Alan Greenspan in an earlier speech.) Bernanke likened the increase to the imposition of a tax on U.S. consumers, “with the revenue from the tax going to oil producers abroad.”

The Fed’s approach to adjusting monetary policy in the face of foreseeably high oil prices requires balancing the goals of low unemployment and low inflation. The Federal Open Market Committee (FOMC) concluded that recent inflationary pressure is transitory and that the core inflation rate will remain low, he said. The FOMC is monitoring inflationary pressures closely, he added, and will adjust policy decisions accordingly.

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