For every American who thought monetary policy didn’t matter in their daily lives, a new study by the Republican staff of the Joint Economic Committee provides a very real reason why they should be paying attention.
As of May 2, American families and small businesses are paying 56.5 cents more for every gallon of gasoline they pump, thanks to the Federal Reserve’s unprecedented pumping of dollars into the American economy.
The JEC study, titled “The Price of Oil and the Value of the Dollar,” notes that the value of the U.S. dollar has declined 14 percent since the Federal Reserve began its program of quantitative easing in late November 2008.
Oil is an international commodity that trades in dollars. Three of the most important factors determining global oil prices are global production, the volume of oil inventories and the value of the dollar.
Over time, a stronger dollar tends to reduce oil prices, while a weaker dollar tends to boost oil prices.
The declining value of the dollar has added $17.04 per barrel to the price of Brent crude, which is used to refine gasoline. Since the price of oil and gasoline rise in concert, 56.5 cents has been added to the price of every gallon of gas.
The declining “trade-weighted” or “international” value of the dollar has also exposed U.S. consumers to higher prices on a host of other staples from milk to many other items transported daily to our stores.
At a time when families and small businesses across the country are clipping every coupon and pinching every penny to pay for $4-a-gallon gas, there are two lessons we can learn.
Rather than point fingers at energy producers, President Barack Obama should be looking to his own Treasury and the Fed for answers to the high price of fuel.
And this drives home the point that the Federal Reserve should have one mandate: price stability. Preventing inflation and preserving the value of the dollar is the Fed’s role, not propping up failed mortgage giants Fannie Mae and Freddie Mac.
For an extended period of time now, the Fed has maintained an exceptionally low federal funds target rate. Its program of quantitative easing (known as QE1 and QE2) and its purchases of government-sponsored enterprise obligations, mortgage-backed securities and Treasury securities have all been accompanied by a steady decline in the value of the dollar.
A new U.S. energy policy that would open portions of the outer continental shelf and Alaska to oil exploration, and production should help to curb high oil prices over time by increasing global oil production.But it may not provide short-term price relief.
However, the Federal Reserve can stabilize the value of the dollar by returning to a normal policy stance and ending this extended period of extraordinary monetary easing and extremely low interest rates.
In turn, a stable U.S. dollar should help to pierce the oil-price bubble that has sent gasoline prices soaring in recent months.
Rep. Kevin Brady is a Texas Republican.