The Federal Reserve cut interest rates dramatically from 8/15/07 through 3/18/08.  The Federal Funds rate was steadily reduced from 5.25% to 2.25% over a 7 month period.  These cuts were largely ignored by central banks around the world which left rates intact.  The stated purpose of the interest rate cuts were to prop up the economy as housing prices fell and to inject liquidity into the financial system as the credit environment deteriorated.

The Fed Funds rate cuts had no chance of having a positive impact on housing prices or the housing industry.  The Feds don't control mortgage rates, the market does.  The Feds can't force lenders to lend or borrowers to borrow.  Federal Reserve initiatives matter little when the instruments which led to the housing bubble (Affordable Mortgages and Subrime Lending) are no longer being offered by the market.  And in a reality where house prices are deteriorating it is difficult to get people to borrow money to buy depreciating assets. 

It is debatable whether the rapid succession of cuts improved liquidity, but given the steady pace of the worsening credit environment, no reasonable person could argue that the Federal Reserves policies succeeded. 

Interest rate cuts did dramatically impact the economy though.  The dollar was rapidly devalued.  Given that we are a net importer, a net borrower and a non-manufacturing based economy, the devalued dollar was far more damaging to the US economy than any possible benefit produced by reduced interest rates. 

All imports, which include most commodities and oil, rose steadily in price as the dollar declined in value.  Oil and gas prices, which directly impact the economy and consumer confidence, ascended to record levels.  This was an unnecessary price shock and occurred at a terrible time for the economy.  It was also directly caused by the Federal Reserve.

Steady commodity price appreciation is not ignored by institutional investors.  In an environment where the risk and volatility of most asset classes was increasing, commodities became an attractive investment opportunity.  The price of a barrel of oil rose from $70 to $110 as the Federal Reserve slashed interest rates over a 7 month period. 

This dynamic closely resembled the bubble created in the Housing Industry by government intervention but on a much more rapid scale.  Government actions contributed to steady and outsized appreciation.  Investors noticed the profit opportunity and piled on the trend.  Momentum investing lead to more momentum investing and prices decoupled from fundamentals.  By the time the Federal Reserve stopped cutting interest rates oil prices had a kinetic energy of their own.

Prices rose to a high of $145 a barrel.  Politicians decided to ignore the role of the Federal Reserve in the price swing and blame speculators for the appreciation.  And there is no doubt that profit seeking investors were attracted to the steady rate of price appreciation.  But the bubble would not have occurred without uneccessary and extreme dollar devaluation by the Fed.  I wonder why those same politicians weren't complaining about rising home prices during the Housing Bubble and blaming home buyers (speculators) for prices decoupling from fundamentals?  And like all bubbles, the oil run-up reversed itself (to the detriment of long speculators).

While oil prices began to correct in July, the trend has been reinforced by the rapid appreciation of the US dollar.  Effectively, the rest of the world came to terms with the global economic meltdown.  Central banks around the world began slashing interest rates, injecting liquidity into frozen credit markets, emerging markets began to falter and the global stock markets collapsed. 

As ugly as the US economy is, on a relative basis its interest rates were rising and its risk was falling.  The dramatic appreciation of the dollar seen since mid-July was a Flight to Safety.  The dollar is still the world's currency and its safest store of value.  The US economy seems safe relative to countries like Russia, Iceland, Hungary, Brazil, Argentina and most of the emerging world. 

With the exception of oil's "Momentum" period from $110 to $145 a barrel from 3/18 through 7/14, oil has had a remarkable correlation with the movement of the US dollar as seen in the chart above.

I wonder why we don't hear politicians complaining about the rapid and dramatic collapse of oil prices?  Where are the complaints about speculators betting that oil will continue to fall in value?