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Published on November 5, 2007

Last Wednesday, the Fed cut the federal funds rate - a key short-term interest rate - by one-quarter of a percentage point to 4.5 per cent. This came on the heels of a rate cut in September.

The turmoil in the financial markets was triggered by the sub-prime mortgage crisis caused by home loans given to people with weak credit histories. The US gross domestic product for the July-September quarter grew at a brisk 3.9 per cent pace -the fastest in one to one-and-a-half years - despite the strain of a slump in the housing market. The Fed felt the latest rate cut was essential to prevent the adverse effects of financial jitters and the housing slump from spreading to the broader economy. However, US stock prices remained erratic, which seemed to spur the need for a further rate cut.

The price of oil in the US market has hit a record of more than US$96 (Bt3,263) a barrel, while gold prices recently hit a 28-year high.

Prices for oil and other commodities skyrocketed after speculative funds, which shied away from the stock market due to the sub-prime mortgage crisis, flowed into the commodity markets. Some observers have pointed out that the Fed's credit-easing policy has allowed the speculative funds to muscle in on these markets.

In its statement after the recent rate cut, the Fed said it would shift from its current stance of giving top priority to economic growth to one in which the upside risks to inflation "roughly balance" the downside risks to growth.

The Fed must exercise utmost care to ensure its policy can cope with shifts in both the real economy and money flows.

Surges in global prices of crude oil and agricultural products are making their presence felt in prices in Japan. The nation's consumer price index, excluding perishable foods, is still lower than last year's figure. But recent increases in gas and food prices might leave people feeling as though these goods are more expensive than last year.  Of most concern is the tepid growth in wages. If prices of daily goods continue to increase even as wages remain stagnant, many consumers will worry that prices could rise even further. Consequently, consumer spending will cool off.

The Bank of Japan plans to increase interest rates gradually. It expects the economy will continue to expand as brisk performances in the corporate sector trickle down to households. Will the nation's economy follow such a scenario? One reason behind the slow increase in wages is the fact that small and mid-sized companies in Japan are struggling to stay afloat because they cannot pass on rises in raw material prices to consumers. If prices slowly increase, these companies can pass on the price rises, leading to higher wages for employees.

How to create such a cycle will be critical for the economy.

The Yomiuri Shimbun is a member of the Asia News Network.

Soaring global oil prices

The Straits Times

SINGAPORE - It is difficult to remain optimistic about the global economy as oil prices go above US$96 (Bt3,263) a barrel this week and come almost within reach of the inflation-adjusted 1980 record of $101.70. Economists think the spike is unsustainable. But the reasons they cite do not entirely support such a benign view.

The weakening dollar may have prompted importers to increase orders for this and other greenback-priced commodities. But this doesn't make things any cheaper for Americans. And it is these consumers' spending that drives the US economy, on which the economies of exporting countries largely depend.

The US Federal Reserve's short-term interest rate cut in mid-week might have added liquidity and spurred demand. But the cut itself reflected concerns that growth is slowing ahead of the US presidential election next year.

And aye, as they say, there's the rub: oil prices will fall, but only when the US and other large economies falter. Such cold comfort appears to be all that there is. Another reason is that stockpiles are dwindling as the northern winter approaches, as though the industry does not plan for seasonal demand.

Political and security uncertainties appear to have more credence, but do not explain satisfactorily the hike. Apart from the US-Iran tension, oil-rich northern Iraq is again looming as a hot spot after skirmishes between Kurdish rebels and Turkish troops.

But such political risks have been a fact of life as far back as and even beyond the 1970s Opec boycott. The longer-term trends don't look good either. Some analysts insist oil hikes will not trigger a recession this time as they did in the 1970s and 1980s. They assume conservation, alternative sources and efficient use of energy have cut fossil fuel dependence. If that is so, why the near-record prices?

The story lies in the huge and swift rise in demand by rapidly industrialising countries like China and India. Otherwise they cannot meet ambitious development goals and expectations of rising living standards.

Will they become powerful economic locomotives in their own right before oil is priced beyond their reach? If so, the world may indeed not go into an oil-induced recession. But before they do, the pain of expensive oil is a reminder and an added impetus to the emerging international consensus to diversify sources and increase efficiency.

Apart from being a psychological threshold, $100 a barrel may prove to be a market inflection point tipping the balance irreversibly away from oil towards other, less polluting, means and methods. If that happens, it will be a silver lining to an otherwise gloomy energy and economic outlook, with the bonus of a greener environment.

The Straits Times is a member of the Asia News Network.

The Yomiuri Shimbun