Weak oil prices good for US economy, says Minneapolis Fed chief

The drop in crude oil prices has put money in consumers' pockets and is "a good thing, basically" for the US economy, according to Minneapolis Federal Reserve president Narayana Kocherlakota.

But the oil price rout will weigh on drilling and on production in North Dakota, where the local economy has experienced an oil-driven boom over the past several years, Kocherlakota said at a town hall meeting at his bank's headquarters on 8 January.

The Minneapolis Fed chief also said he believes the American economy can continue to grow even if the world economy weakened, Reuters reported.

However, he restated his view that the biggest challenge for US growth was whether the nation's central bank will be patient enough before raising rates, a move that could potentially choke off recovery.

Analysts take

Capital Economics said in an 8 January note to clients: "The slump in oil prices, along with renewed concerns about Greece, have taken a toll on investor confidence in the past week or so, causing equity markets to fall and demand for safe-haven assets to rise. This partly reflects concerns about the impact of lower oil prices on energy companies and oil-dependent economies.

"However, for the world as a whole, the boost to demand from cheaper oil should outweigh these negatives. This will help to ensure that the world economy continues to grow at a steady, although highly uneven, pace.

"Lower oil prices will also drag inflation below zero in many advanced economies."

Standard Chartered said in a note: "We think the focus will be on US hourly earnings data. Stronger wage growth has been the 'missing link' ahead of the expected Fed tightening. The 0.4% m/m November [2014] print raised hopes that wage growth was on the verge of a pick-up; December's data will help to assess the trajectory."

"For now, we remain cool-headed. We still see bargaining power staying with firms rather than employees, as slack remains. We expect 'a regression to the mean', with a trend-like 0.2% m/m print. This would translate into 2.2% y/y, not far from a 12-month average of 2.0%.

"Still-modest wage growth would support the Fed's 'wait and see stance', particularly as core inflation is also on the soft side.

"We see no rate hike before September."

Scotiabank said in a recent note: "We continue to expect the Federal Reserve to raise the Federal Funds rate in Q2 2015.

"Recent guidance from the Federal Reserve combined with strong fundamental economic data have reinforced this view. In particular, the FOMC communicated at its December [2014] meeting that it will not raise rates during the subsequent two meetings but could raise rates thereafter, albeit gradually (it called this 'patience'). The minutes from the meeting implied that the Fed would feel comfortable raising rates with core inflation near current levels."