High Crude Oil Prices? It's the Fed, Stupid

The Fed has slashed interest rates by 325 basis points since the credit storm made landfall on Wall Street last summer.

On Wednesday, the Fed elected to keep rates steady, with only Dallas Fed President Richard Fisher dissenting from the decision in favor of a rate hike.

While the Fed took no action, meeting expectations on Wall Street, it did talk tough about inflation in its policy statement.

"Although downside risks to growth remain, they appear to have diminished somewhat, and the upside risks to inflation and inflation expectations have increased," the central bank said.

The Fed also reiterated its longstanding -- but so-far woeful -- forecast that inflation pressures will soon abate as oil prices moderate.

"However, in light of the continued increases in the prices of energy and some other commodities and the elevated state of some indicators of inflation expectations, uncertainty about the inflation outlook remains high," said the Fed.

Despite those statements, futures markets show that expectations for rate hikes from the Fed later this year are waning. Crude oil prices set a new record above $142 a barrel in trading on Friday, while the dollar weakened against other major currencies. The Dow Jones Industrial Average, meanwhile, made new lows for 2008, with shares of General Motors(GM Quote) hovering near a 53-year low.

Bank shares have also been crushed of late, with Merrill Lynch(MER Quote) dipping Friday after a Lehman Brothers analyst said it expected $5.4 billion in fresh writedowns in the second quarter, due to downgrades to bond insurers MBIA(MBI Quote) and Ambac(ABK Quote).