Federal Reserve & Interest Rates

The price of gas is getter closer and closer to $4 per gallon.  Light, sweet crude oil jumped to $118.05 per barrel today, and that means gasoline costs are not going to get any cheaper for a while.  With the economic conditions the way they are, saving money is crucial.  Here are some tips on improving your gas mileage and saving on gasoline costs.

Control your speed without so much braking.  Your gas burns up faster whenever you accelerate too much and then brake.  It is better to reduce your speed, lift your foot from the gas pedal, and only brake when you absolutely need to.  Driving slower (which most people are to much in a rush to do) will save you gas as well.

If you have cruise control, use it if there isn’t too much traffic.  The less you use your gas and brake pedal, the more efficient your gas mileage will be.  Try to use a slightly slower speed than you normally drive (again, applying the driving slower tip).

Don’t waste your gas on air conditioning. If you are in a very warm climate, that might not be an option for you, but you can cut back by turning of the air conditioner a few minutes before you get where you need to go.  Your car should already be cool enough to keep you from burning up for those last five minutes.  If you are making a short trip, and the weather isn’t too hot, just don’t turn it on.

Top off your gas tank.  Your fuel burns more quickly when the tank is not full.  Waiting until you are almost on empty can actually cost you more, and you will really feel the rise in prices that way.

Check your tire pressure.  Your fuel economy is affected by the level of your tire pressure.  Make sure they are filled to the right pressure.

Obvious ways to save on gas include driving less and carpooling.  You can combine errands that require trips (like the bank, grocery store, and post office) and save on the trip back and forth from home to each individual place.

These tips should help you cope with the spike in the price of oil.  It is good to save where you can.

On Friday, April 18, 2008, crude oil reached a new record.  Each barrel now costs $117, which makes gasoline prices closer to $3.50-$4.00 per gallon.  Oil prices have been rising for five consecutive days.

News reports are saying that a major pipeline in Nigeria was damaged.  There is a militant group that is allegedly responsible for a local explosion that hindered about 20% of the daily output of oil from that location.  There are threats of continued attacks on major oil supplies in that area.  Nigeria is a major supplier of oil for the United States.

Gas supplies for the U.S. are weakening.  The weakness of the dollar is making oil a more desirable purchase for other countries.  Meanwhile, oil is more and more expensive to the U.S.  Supply is barely meeting demand.  Unfortunately, this is the time of year when people need to fill their tanks more often for trips in the warm weather.  Travelers are going to have to set aside more money for fuel.

Don’t be surprised if some gas stations are short of fuel or even shutting down.  Some local gasoline companies might not be able to afford higher prices per barrel, and there may be some delays in gaining access to oil supplies.

The dollar will most likely continue to trade weak against the euro and the British pound.  Especially since the European Central Bank has not reduced interest rates and the Federal Reserve is expected to continue to cut rate throughout this year.  The cuts in the interest rates make it difficult to curb inflation, raises the cost of imports, and is thus increasing the price of oil.  Food costs are also geared for further increases in the coming months.

The major focus of the Federal Reserve at this time is somehow stimulating long-term economic growth and maintaining liquidity to avoid a major credit crunch.  The Board has noted that they are aware of the inflation risks, and will keep an eye on the situation.

For now, the best idea is to keep travel to a minimum, carpool, and budget a few extra dollars for gasoline.  The cost won’t be going down at least for a few months.

Vice Chairman of the Federal Reserve Board Donald Kohn gave a speech today in North Carolina.  He stressed the needs for a better response to financial turmoil.  He offered his take on what banks and the Federal Reserve need to do.  Here are some highlights of his speech.

A more resilient financial system will also require banks to strengthen all aspects of the originate-to-distribute model. They need to pay more attention to origination, including when they are distributing credits they have not originated. And they need to ensure that when they distribute risks into the market with securitization, the risks really are distributed and will not come back onto their balance sheet later.

At the Federal Reserve and at other bank regulatory agencies, our job is to reinforce the incentives and actions that are building a more resilient financial system. We need to make sure that regulatory minimum capital requirements and liquidity management plans protect reasonably well against shocks becoming systemic. Our supervisory guidance needs to be in place to prevent backsliding when, over the coming years, the memories and lessons of the current market turmoil fade, as they certainly will.

Vice Chairman Kohn also talked about some specific financial stability concerns.  Here are the three issues that he noted.

First, securities markets have become so large that commercial banks simply lack sufficient capital and balance sheet capacity to readily fill the gap when markets are impaired.

Third, large commercial banks and investment banks have increasingly similar risk profiles, so that all are subject to the same risk-management challenges under the same circumstances.

Kohn is basically worried about excessive leverage problems and the susceptibility to runs on banks and securities firms.  He believes that monetary policy needs to give attention to the “liquidity risk-management policies and practices of major investment banks,” and commercial banks.