The Fed discount rate is directly tied to inflation, that is, the money supply in relation to demand for the U.S. dollar. The Fed’s interest rate affects everything valued in dollars.

Barrels of Oil, for example, are only traded in dollars internationally. So, if the Fed Reserve cuts its interest rate, it makes more dollars chasing the same amount of oil.

Think about this: the fed cuts its rate from 5.25 percent to 2 percent in a 19-month period. That is a decrease of more than 50 percent. Now think about the cost of a barrel of oil, and remember, they are traded only in dollars.

So, the Fed cuts its rate by 50 percent, so maybe (admittedly shaky math here) the cost of a barrel of oil should go from $60 to $90 simply because the U.S. decided to increase the money supply by lowering interest rates.

Now think about commodities traders (Viva la Chicago). They see the price per barrel go from $60 to $90 in a year. Holy cow! That is a hot commodity.

So watch as institutional investors pile into oil futures, which are only available for the short-term, about a year. By this time a barrel of oil is starting to be worth about $145 at peak price.

This is when the big guys-hedge funds, retirement funds, college foundations-sell these futures to the less informed or less scrupulous investors. And who do they, the “less,” sell their oil to? Nobody.

Oh no! Public, private and consumer demand has dropped, and investors aren’t so sure about that commodities investment anymore, or any investment for that matter.

Watch as oil falls in a matter of weeks back below $100! And here is the last thing we’ll see: oil hanging at around $90 a barrel, at least until the Fed Reserve brings up the interest rate to a reasonable level 4 percent anyone.

So we have to ask ourselves, why is the Fed cutting the interest rate if it is causing ridiculous gas prices? Well, when the interest rate is lower, it encourages businesses to invest because the cost of borrowing for expansion falls, as well as making safer vehicles for investment, such as savings accounts, less desirable.

The government’s purpose in cutting the interest rate is to allow business that employs your mom or dad and paying feel like it can afford to keep paying employees and expand production.

But if we are trying to improve the economy, what about this inflation? The big question the Fed, and informed citizens, need to ask is whether the economic gains from the interest rate cut outweigh these energy, transportation, and food cost increases.

If they do, who benefits? Businesses might start doing better, but mom and dad are dying financially over their commutes. These questions are being ignored. We are shooting ourselves in one leg to cover the broken bone in the other. Is it worth it?

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