What A Fed Rate Hike Means For U.S. Shale
North American shale oil and gas companies have proven that they can adapt their business model through the lower crude oil prices cycle. Now, the new challenge for shale producers is how to adjust their financial strategy when the Federal Reserve (Fed) raises interest rates.
Since the 2007 financial crisis, the Fed interest rate has declined from 5 to 1.25 percent, having hit the record low of 0.25 percent in December 2008, just four months after the Lehman Brothers bankruptcy that triggered a domino effect across the financial sector.
The Fed’s actions weren’t enough to stabilize the American economy, but thanks to U.S. Congress approval of the American Recovery and Reinvestment Act of 2009, business activities began to re-emerge due to the nation’s economic stimulus package supported by tax breaks, quantitative easing (QE), and government spending.
At last, those recovery measures and the Fed’s rate cut helped stabilize the financial markets following the financial crisis. But most important for the Fed, it led to lower unemployment rates, which dropped 4.4 percent lower in August 2017.
For these reasons, the Fed has struggled with ‘rate normalization’ (returning rates to pre-crisis levels), having seen market participants become highly reliant on its record-low interest rates and improved access to finances with QE.
QE has also played a key role in capital allocation decisions by forcing investors out of the bond markets and into the riskier stocks/equities markets by suppressing bond yields with the purchase of billions in government debt since late 2008.
The Fed has watched crude oil price closely since the crisis, because when oil prices fall they tend to pull down inflation with them. However, once they begin to stabilize—at whatever level—their impact on inflation dissipates over time. Since the beginning of 2017, not only have crude oil prices stabilized, but they’ve also increased, but the impact on U.S. inflation remained weak throughout this time.
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