Several of Mr. Bernanke’s critics, including yours truly, believe that QE-2.0 has been a major contributor to soaring commodity prices. Soaring food prices certainly contributed to the “unrest” Mr. Bernanke noted in passing in his congressional testimony yesterday. The unrest has resulted in higher fuel prices. While the direct link between QE-2.0 and soaring commodity prices isn’t obvious to the Fed Chairman, it is to me. QE-2.0 unambiguously reinforced the Fed’s long-standing commitment to keep the federal funds rate at nearly zero for an “extended period.” He just doesn’t get it: Easy money always causes bubbles. It is causing one right now in the commodity markets.
All bets are off if the price of Brent crude oil spikes up to $150 a barrel. I first wrote that in the February 17 Morning Briefing. It may be wise to take some bets off even now. I’ve been expecting the oil price to stabilize around $100, but worrying that the chaos in the Middle East might cause a spike to the 2008 record high. I’ve been counting on “stable” OPEC producers to increase their output to offset any shortfalls among “unstable” OPEC producers. That’s reportedly happening right now as the Saudis claim to be set to offset the drop in Libya’s production. Well, Brent soared right through $100 on January 31, and hasn’t looked back as it gapped up in recent days to $115.47 this morning. Oil traders aren’t convinced that the Saudi situation is stable given that dissidents have scheduled a “Day of Rage” in Riyadh on March 11 and another one on March 20.