To Lower the Price of Oil, Raise Fed Funds Rate

It is amazing how much nonsense is thrown around by people on CNBC.  Dennis pleading with the president of NYMEX to raise margin requirements so speculators cannot take such big positions.  Congresspeople talking about curbing speculators (see below).  Can we really so stupid as to blame the messenger rather than attacking the causes?

It is very simple.  If you want to bring down the price of oil, boost the value of the dollar in such a way that it is expected to be permanent and ongoing.  The way to do this is to raise the Fed Funds rate immediately by 50bp.  (This will not help in the case that Israel attacks Iran, but is the way to bring the price down permanently.)

And now you hear talk of intervention.  This should already have been done.  When Bernanke went on TV on Tuesday, there should already have been a plan in place to defend 1.5600 or so versus the Euro – where the pair was when Bernanke started speaking Tuesday morning.  The Treasury should have directed the Fed to intervene until the Fed got their act together and raised the Fed Funds rate.  And the Treasury should be pressuring the Fed to raise the rate as well.  Or you fire Bernanke the dove and replace him with a hawk.  This would be unsettling to markets unless you specified that a dove was being replaced with a hawk, so you would have to specify that.

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