For some time, at least since the United States became an oil importer, it has been believed that a low price of oil is good for the economy. So when the price of oil began its descent below $100 a barrel, we kept looking for an oil-price-cut dividend. But that dividend has been hard to discern in the macroeconomic data. Part of the reason is that as a result of the rapid expansion of the production of oil from shale, total U.S. oil production had risen rapidly, and so a larger part of the economy was adversely affected by the decline in the price of oil. Another part is that investment in the equipment and structures needed for shale oil production had become an important component of aggregate U.S. investment, and that component began a rapid decline. For these reasons, although the United States has remained an oil importer, the decrease in the world price of oil had a mixed effect on U.S. gross domestic product. There is reason to believe that when the price of oil stabilizes, and U.S. shale oil production reaches its new equilibrium, the overall effect of the decline in the price of oil will be seen to have had a positive effect on aggregate demand in the United States, since lower energy prices are providing a noticeable boost to the real incomes of households.

I think we have been and markets have been and we have been quite surprised by movements in oil prices. I think in part they reflect supply influences, but demand may also play a role.

The stronger dollar is partly something that we anticipated because the U.S. economy has been performing more strongly than many foreign economies, and we have a divergence in the stance of monetary policy that influences capital flows in the dollar. Nevertheless, the strength of the dollar and the extent to which it has moved up since mid-2014 is not something that we anticipated.

So yes, we've been surprised in part by those developments and they have played a significant role in holding down inflation.

The big declines in energy prices came toward the end of last year and the beginning of this year, and they're not going to wash out of the inflation data until late in this year. But the fact that energy prices have stabilized means that the pressure from that source is diminishing.

The appreciation of the dollar since last summer will likely affect the export sector, to some extent. My view is that the impact of the dollar's more expensive exchange value and, for that matter, the direct impact of lower oil prices on the energy sector are not severe for the national economy as a whole. But whenever two major world "prices" adjust so markedly, unanticipated second- and third-order effects could result. Geopolitical event risk connected to the rapid adjustment of these globally high-impact prices cannot be dismissed. Analytical humility is a sensible posture.

I think the judgment of the committee is that from the standpoint of the United States and the U.S. outlook, that the decline we have seen in oil prices is likely to be on net a positive. It's something that's certainly good for families, for households. It's putting more money in their pockets, having to spend less on gas and energy. And so in that sense, it's like a tax cut that boosts their spending power.

The United States remains, although our production of oil has increased dramatically, we still remain a net importer of oil. Of course, there may be some offset in the form of reduced drilling activity and possibly some change, some reduction in cap ex plans in the drilling area. But on balance, I would see these developments as positive from the standpoint of the U.S. economy.

With respect to deflation, we see downward pressure on headline inflation from declining energy prices. We certainly recognize that that is going to be pushing down headline inflation and may even spill over to some extent to core inflation. But at this point, although we indicated we're monitoring inflation developments carefully, we see these developments as transitory.

Im not really worried about, right now, the risk of further disinflationary pressures beyond the energy price effects, and I am pretty confident that were on the right trajectory in terms of bringing inflation back to 2%, he said.

In fact, he said, the plunge in oil prices is a huge plus for U.S. consumers and businesses.

Another positive development for both the U.S. and the global economy is the sharp decline in energy prices. Lets start with the U.S. perspective. Despite the impressive recent gains in natural gas and crude oil production, the U.S. still is a net importer of energy. As a result, falling energy prices are beneficial for our economy. In economist parlance, falling energy prices are a positive terms of trade shock for the U.S. Over the near-term, this will lead to a significant rise in real income growth for households and should be a strong spur to consumer spending.

More broadly, the decline in energy prices also will be supportive to the global growth outlook in two other ways. First, by pulling down inflation in many countries it will spur more expansive monetary policy. We are already seeing this response in Europe and Japan. Second, the decline in energy prices is also likely to ease the global fiscal stance. Over the near-term, for oil exporting governments, falling revenue will not be fully offset by reduced expenditures. This will cause major oil exporters to run either smaller budget surpluses or bigger budget deficits.

I have tried to offer some perspectives on the nature of the macroeconomic situation during 2008.
At the one-year anniversary of the financial crisis, in August 2008, it appeared that the U.S. had weathered the crisis reasonably well, and that continued slow growth was likely.
However, the effects of the commodity price boom during the preceding year, peaking in July 2008, contributed to a slowing economy during the third quarter of 2008.
This greatly exacerbated the financial crisis and led to multiple financial firm failures.

The U.S. is in the middle of an energy revolution marked by a steady rise in oil and natural gas production. Just as significant, the sharp fall in natural gas prices in the U.S. has created a huge impetus to investment in energy-intensive manufacturing, such as in petrochemicals. Because the lead times on such investment are long, this impulse will likely persist for many years.

While supply and demand fundamentals surely account for most of the recent movements in commodity prices, some observers have attributed a significant portion of the run-up in prices to Federal Reserve policies, over and above the effects of those policies on U.S. economic growth. For example, some have argued that accommodative U.S. monetary policy has driven down the foreign exchange value of the dollar, thereby boosting the dollar price of commodities...

In this case, the direction of causality runs from commodity prices to the dollar rather than the other way around. The best way for the Federal Reserve to support the fundamental value of the dollar in the medium term is to pursue our dual mandate of maximum employment and price stability, and we will certainly do that.

Another argument that has been made is that low interest rates have pushed up commodity prices by reducing the cost of holding inventories, thus boosting commodity demand, or by encouraging speculators to push commodity futures prices above their fundamental levels. In either case, if such forces were driving commodity prices materially and persistently higher, we should see corresponding increases in commodity inventories, as higher prices curtailed consumption and boosted production relative to their fundamental levels. In fact, inventories of most commodities have not shown sizable increases over the past year as prices rose; indeed, increases in prices have often been associated with lower rather than higher levels of inventories, likely reflecting strong demand or weak supply that tends to put pressure on available stocks.

...

There's not much the Federal Reserve can do about gas prices, per se, at least not without derailing growth entirely, which is certainly not the right way to go. 

After all, the Fed can't create more oil. We don't control the growth rates of emerging market economies.  What we can do is basically try to keep higher gas prices from passing into other prices and wages throughout the economy and creating a broader inflation, which would be much more difficult to extinguish.

We have a rapidly growing global economy, emerging market economies are growing very quickly, and their demand for commodities, including oil, is very, very strong. 

Indeed, essentially all of the increase in the demand for oil in the last couple years, in the last decade has come from emerging market economies. In the United States, our demand for oil, our imports have actually been going down over time. 

So the demand is coming from a growing economy, where we've seen about a 25 percent increase in emerging market output in the last -- in the last -- since before the crisis.  

Lockhart, who has voiced support for the central bank’s plan to buy the $600 billion of Treasuries, said that so far “the economy seems to be absorbing that higher cost [of oil prices] without severe reaction.” If oil prices top $150 a barrel for a sustained period, “it could have a more serious effect,” and “we could be in recessionary territory,” he said.

Some fear that the strong rise in commodity and energy prices will lead to a more general sustained inflation. Yet, at the end of the day, such price shocks don’t create sustained inflation, monetary policy does.

Nevertheless, there are important mitigating factors that suggest that it would be unwise for the Federal Reserve to over-react to recent commodity price pressures. First, despite the general uptrend, some of the recent commodity price pressures are likely to be temporary. In particular, much of the most recent rise in food prices is due to a sharp drop in production caused by poor weather rather than a surge in consumption (Chart 26). More typical weather and higher prices should generate a rise in production that should push prices somewhat lower. This is certainly what is anticipated by market participants, as shown in Chart 27.