Simon Lack, Portfolio Manager

The Administration’s planned release of 1 million barrels of oil a day from the Strategic Petroleum Reserve (SPR) is borne of their frustration with high prices. Average crude prices have been higher under Biden than Trump, even after adjusting for the collapse during Covid (not Trump’s fault) and the jump following Russia’s invasion (not Biden’s fault).

In mid-January in Why You Shouldn’t Expect A Return To 2% Inflation we explained some of the persistent upward pressures on inflation. Since then ten year inflation expectations derived from the treasury bond market have increased by 0.5%. Russia’s invasion of Ukraine is a big factor, but nonetheless a half point increase over the next decade is a substantial move. Preserving purchasing power is the point of saving, and inflation entrenched at a higher level investors presents new challenges to investors.

It must have been a lively FOMC meeting last week. The Fed has obviously committed their biggest mistake in living memory, and they finally started to normalize short term rates. They’re a year late, to the evident frustration of James Bullard who dissented on the 0.25% increase because he preferred 0.50%.

Next week the Fed Funds rate is expected to be raised, for the first time in over three years. Pundits love to say the Federal Reserve is “in a corner”, implying a Hobson’s Choice between possible courses of action. This hackneyed term is being deployed again, mischaracterizing their choices.

Had Jay Powell and the FOMC prudently begun reducing the economy’s degree of monetary support a year ago when the Covid vaccine was already being administered, they’d have more flexibility to manage the economy’s current challenges. From a 2% neutral rate and with the balance sheet shrinking, they’d be able to pivot towards easing or further tightening depending on circumstances. Because of that policy error they’re now having to get back to neutral during high economic uncertainty.

Had Jay Powell and the FOMC prudently begun reducing the economy’s degree of monetary support a year ago when the Covid vaccine was already being administered, they’d have more flexibility to manage the economy’s current challenges. From a 2% neutral rate and with the balance sheet shrinking, they’d be able to pivot towards easing or further tightening depending on circumstances. Because of that policy error they’re now having to get back to neutral during high economic uncertainty.

Maslow’s Hierarchy of Needs is a stylized pyramid with food and shelter at the base and self-actualization at the top. Maslow wasn’t around to contemplate where ESG (Environmental, Social and Governance) aspirations sit on his pyramid, but he would likely have placed them near the summit. The people and institutions most sensitive to ESG have already satisfied the other needs on the pyramid.

Maslow’s Hierarchy of Needs is a stylized pyramid with food and shelter at the base and self-actualization at the top. Maslow wasn’t around to contemplate where ESG (Environmental, Social and Governance) aspirations sit on his pyramid, but he would likely have placed them near the summit. The people and institutions most sensitive to ESG have already satisfied the other needs on the pyramid.