Fed Should Have Reacted More Strongly to Surging Oil Prices in 2004-2006, Report Finds

The Federal Reserve building in Washington, D.C. (image: ou.edu)

A research paper released today by a group of well-known economists faults the US Federal Reserve for not hiking interest rates more quickly in the middle of the decade in response to rising oil prices. The paper was authored by two private-sector economists and two academic economists, and was released at an academic forum.

From Marketwatch.com: “’The boom in oil prices coincided with booms in two other asset markets - credit and housing - and the combination of strength in all of those markets should have been a warning sign,’ the report concludes.”

Theoretically, if the Fed had hiked interest rates more quickly, the upward spiral in the oil, credit, and housing markets might have been slowed and the current financial crisis may have been averted or at least made less severe.  The findings are not too helpful in our current financial situation, but could help guide the Fed’s action, should similar circumstances arise sometime in the future.