Intelligent Investing
Will Oil Spike Lead To QE3?

Mar. 7 2011 - 5:49 pm - Chris Barth

Recent comments from Atlanta Federal Reserve President Dennis Lockhart, combined with spiking oil prices, have led to speculation regarding future rounds of quantitative easing. Lockhart spoke recently at the National Association of Business Economics conference, commenting on rising oil prices and the potential for spikes to affect the economic recovery.

“I would take a position we would respond with more accommodation” Lockhart said, regarding the potential onset of recession as a result of oil price increases. While current – or even slightly elevated – prices are manageable, said Lockhart, “around $150 it becomes a much more serious concern.”

Serious indeed, given that economist Nouriel Roubini is highlighting the potential for oil prices to reach $150 per barrel. Additionally, markets have seen a drastic increase in options trading on $200/barrel oil futures set to expire in mid-May.

Chris Isidore is wondering if Lockhart’s comments could portend QE3, despite the fact that the Atlanta Fed President is not a voting member on the Fed’s policy making committee. Fed Chairman Ben Bernanke, in his statement before Congress last week, did not rule out the possibility of future rounds of quantitative easing.

Richard Lehmann, this week’s guest on Intelligent Investing with Steve Forbes, would likely not be surprised if the Fed did announce QE3, spurred on by rising oil prices. When I spoke to him last month, Lehmann noted that QE1 and QE2 were employed for different purposes, and further rounds of easing would likely follow the same pattern.

“That label QE is a nice, convenient way of masking what is actually going on,” Lehmann told me. “If they announce a QE3, it’s going to have to be for different reasons than the ones that motivated QE2.”

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