The KC Fed Disagrees

In contrast to what I suggested yesterday, the head of the Kansas City Fed thinks that current oil prices will have little effect on the US economy. From CNN/Money:

“As long as oil prices do not rise significantly higher, the likely effects of recent increases will be relatively modest on the U.S. economy,” Kansas City Federal Reserve Bank President Thomas Hoenig told a forum of local business leaders Tuesday.

…He said that the country was better protected from an oil shock than in the past and also had the benefit of monetary and fiscal policies that were both aiding growth. Nor were oil prices, once adjusted for inflation, that steep in historical terms.

I disagree with that last statement. Yes, real oil prices were higher in the early 1980s; but is that really the benchmark that you want to use for comparison? I actually think that real oil prices are quite high right now, relative to past periods of healthy economic growth. As I pointed out yesterday, the only period in which they were higher was 1979-85. The chart below illustrates.

One last quibble: how exactly is monetary policy “aiding growth” when the Fed is currently increasing interest rates?