How the Fed costs you more at the pump

The Fed's job is to control inflation. But is was established originally to keep financial panics from getting out of control. Since last August, it has reverted to its original role and failed miserably. Since it began cutting its Fed Funds rate 57% from 5.25% to 2.25% the price of a barrel of oil has risen 62% from $71 to $115. Simply put, the weaker the dollar, the higher the price of oil. Bloomberg News proves it -- noting that in the last year, there was a 0.96 correlation -- a correlation of 1.0 would be a completely safe bet -- between the Euro-dollar exchange rate and the price of oil.

If it bothers you to pay $3.66 for a gallon of gasoline you can thank the Fed along with cheerleader, Hank Paulson who brags that he's been talking about the U.S.'s strong dollar policy consistently. Of course saying and doing are two different things. Since January 2001, the dollar has lost 70% to the Euro. And since oil is traded in dollars, a drop in the dollar leads to a rise in price. And lower interest rates erode further the value of the dollar since it pays government bond holders a lower rate of return so they sell the U.S. currency and buy higher yielding ones.

But it's unfair to give the Fed all the blame. After all, we have been running the Federal budget at a deficit -- expected to hit $413 billion this year. Since the Fed has started cutting rates, other factors such as speculation by leveraged traders -- relying on the 0.96 correlation -- and political instability seem to have remained at the same level -- although the degree of speculation seems difficult to measure. And U.S. demand has declined due to the economic slowdown. So it looks like those dollar-weakening rate cuts are the one factor powerful enough to offset the demand slowdown to drive prices up.