Low Oil Prices May Hold the Key to Fed Interest Rate Hikes

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Oil Crash Graphic
Graphic of Oil Prices
Oil Crash Graphic
Graphic of Oil Prices

There are a lot of data points the US Federal Reserve is looking at in determining whether or not interest rate hikes are in order. As you probably already know, if the Federal Reserve hikes interest rates, it spells bad news for the stock market. Whenever it becomes more expensive to borrow money, stocks often take a beating. I highly suspect that a lot of the potential for rate hikes have already been priced into the Dow Jones industrial average. Regardless, expect some rough bumps up ahead as the global investor base becomes accustomed to a higher interest rate environment in the United States. This, of course, runs counter to the interest rate environments in other developed economies like Japan and the Eurozone. One key indicator of whether or not the US Federal Reserve is going to go through with interest rate hike plans is consumer spending.

Consumer spending has been declining in the past two months. According to Wall Street analysts, consumer spending should go back up due to the fact that American consumers are spending less at the pump. I doubt this linkage. According to recent trends, instead of using that windfall courtesy of low gas prices on purchases, most Americans would rather pay off debt or save the money.

Saving doesn’t really help the economy because it doesn’t push production. While it can help the economy in terms of investment, it has a longer timeframe. Automatically assuming that consumers would unleash these savings in the form of consumption, which would then lead to economic overheating, doesn’t fit the facts. If consumer spending does go up, then all bets are off. I suspect that the US consumer spending figures for this month will remain consistent with the declines from previous months.

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