Interest Rate Watch: Oil Hits Record High!
A: Oil is still moving higher (dragging with it precious metal prices) mostly due to geopolitical concerns in Iran and rebel hostility in Nigeria. U.S. crude oil prices topped $72 on Tuesday, an inflation-adjusted record high, as Iran's pursuit of its nuclear program heightened fears the U.S. might take military action against the oil-producing nation.
I really do not see the US taking military action against Iran anytime soon, as we still have the war to finish in Iraq which is costing us billions. Starting another war with a Middle Eastern nation now just seems like an awful political move. Expect the US to try to handle this one diplomatically with more reliance on the IAEA this time around. Although according to todays article:
"The Iranian situation is making us all very nervous... We don't seem to be getting anywhere on the diplomatic solutions," said Deborah White, an analyst at SGCIB in Paris.In any event, the crap is piling high enough in Iran that US leaders are having a hard time staying above it. I do know this, it will get worse before it gets better!
From a interest rate standpoint, I'm hearing and reading many experts say we have only 1 more rate hike ahead of us. I couldn't disagree more! In one of my previous posts I discussed how Fed chief Bernanke is actually finishing what Greenspan started and the importance of the issued statement that comes with each rate hike. In the past statement, there was no wording change to indicate that we have only 1 more rate hike ahead of us:
The statement retained language used last time that "some further policy firming may be needed." That language is seen by financial markets as signal that further rate hikes could occur.
The important thing to note is that THE FED DOES NOT WANT TO SURPRISE THE TRADABLE MARKETS WITH AN UNEXPECTED MONETARY POLICY MOVE! The few other important things to realize is that energy prices (Light Sweet Crude in this case) have risen, political tensions with Iran have escalated, and Nigeria is still not pumping the 500,000 barrels of oil a day that was taken offline by rebels!
What does this mean? There is NO WAY we have only 1 rate hike ahead of us unless a natural or unnatural disaster occurs which disrupts the US economy!
Expect at least 2 more 1/4 point rate hikes as I previously noted, possibly more. If all the concerns I mentioned above (oil, Iran, Nigeria) do not correct themselves over the course of the next few months, than there is a possibility Bernanke will raise rates even further! definitely something to keep an eye out if you intend to borrow money for capital investments!
What to do? In this interest rate rising environment you should:
1. Pay down credit card debt as much as possible.
2. Refinance short term loan debt that may be expiring soon (although if you got in early the cap may save you!)
3. Lock in your mortgage rate NOW rather than later if you know you will buy soon.
As always, I will continue to give you updates as they occur on UrabnDigs so that you can plan your investment strategy accordingly and wisely given what the fed is expected to do. As equity traders will tell you: DON'T FIGHT THE FED!; except on easing cycles when near term growth is pressured. It gets a bit trickier on rate cut cycles.
Comments (2)
the inflation-adjusted record high for oil is over $97, in 1980. We're now at the nominal high.
Posted by chris | April 21, 2006 2:56 PM
thanks Chris for clarifying that.
Posted by Noah | April 21, 2006 3:46 PM