Team Biden and Jerome Powell, FED Chair, are blaming everyone except themselves for inflation and the resulting higher interest rates and gasoline prices.
Let’s take a look at the facts.
Gasoline Futures bottomed in March of 2020 at the bottom of the COVID induced stock market sell-off. The price then was fifty cents. By 2021 prices traded in a range of $2.00-2.50. Prices broke out of that range in December of 2021, a full two months before Putin invaded Ukraine. The chart went parabolic zooming to $3.75 this month. Declaring a war on crude has only slowed oil production while ‘renewables’ are nowhere close to making up the difference.
The yield of the oft quoted Ten Year Treasury Note bottomed as well in March of 2020. Say what, yes, both energy and interest rates bottomed the same month of March, 2020. The spike low for the Ten year was 0.4 percent or near nothing. As with gasoline, rates rose to trade between 1.2.-1.6% for near all of 2021. then, yep there it is again, rates broke to the upside in December 2021. This week The Ten Year raced to 2.4%, a 6x increase.
Google Fed Does Balancing Act and one sees a slew of articles claiming the FED is by golly doing its best to balance rate increases with onerous higher rates that would ‘crush the economy’, so to speak. I would argue the FED is both out of balance and way behind the curve.
While rates were soaring form near nothing to today’s 2.4%, what did the FED do? Nothing, zip, nada. Jerome Powell solemnly announced this inflation is transitory. And the FED continued to dump literally three trillion dollars of ‘stimulus’ (bond purchases) into the economy claiming it needed stimulus. Team Biden’s Democrat majority added even more stimulus with various COVID payment schemes. Finally this month the FED bumped its Fed Funds Rate, the over night rate for bank borrowing, by a quarter point, well whoopee. It also announced it would raise rates another six times this year, presumably a quarter at a time. That would get rates to 1.5-1.75%. But that is way below the reported inflation rate of seven percent or more. The idea is that eventually higher interest rates make borrowing too expensive which slows things, like gasoline prices, down.
For perspective in 2008 when crude oil was trading at $100, the Ten Year Note traded at 4%, well above today’s level.
These statistics defy the conventional wisdom that the FED actually sets interest rates. Plot a graph of the FED Funds Rate against the three month Treasury Bill and one quickly observes the FED follows not leads the market. The FED Chair is no omniscient Wizard of Washington (Oz). Global investor Jim Rogers is generous saying the FED is A player not the player in setting rates. In fact all interest rates from FED Funds overnight to the thirty Year Treasury Bond, openly trade on the Chicago Board of Trade, now a member of the CME Group.
Here is the big picture. Interest rates rose starting in WW II and ending in 1981, for 39 years. Add 39 to 1981 and you get 202, bingo the year rates bottomed, the chart provides perfect symmetry. Cycles are real and now we are in the early stages of a multi-year period of rate increases.
Crude oil peaked at $119 recently, sold off, and bounced to $115. Now there are suggestions to kick Russia out of the G-20 group, but that would require the nerve of say, President Zelenskyy. For now prices remain high amid the tragic invasion. Paul Volcker create that 1981 top, raising rates well into double digits. Jerome Powell, thus far, is no Paul Volcker.
