Mother nature versus Federal Reserve

Stocks closed at fresh highs on Friday after monthly payrolls data hinted at a slowdown in the labor market. Traders are keeping Presidential politics in their peripheral vision as things heat up behind closed doors.

Your powers are useless against me. We can sleep soundly at night knowing that the Federal Reserve is keeping everything in check. Not a worry in the world. The Bank simply raises and lowers some interest rate that is only available to banks and presto, all is good. Inflation is whisked away as if by magic. Economy heading south? Rates are lowered, and Abracadabra, the economy takes off. Why ever worry. It seems so simple, and it is so effective. Ok, I am being a bit of a joker this morning. Really, good on the Fed for coordinating the efforts of all the banks and monitoring things so carefully. It does its best to maintain order in the banking system which, indeed, underpins EVERYTHING economics.

We know the drill by now. If inflation heats up, the Fed makes money so tight that no one can afford to consume or invest. That causes a reduction in demand, which, in theory, abates inflation. There is evidence that the tactic certainly does work on some things, especially when those purchases rely on credit, where higher interest rates make those things even more difficult to purchase. My regular readers know that interest rates have very little impact on the forces that started this nasty spate of inflation. That costpush inflation that came from pandemic-era supply shocks had very little to do with interest rates. The fix for that was simply time and patience. Demand-pull inflation, which is what we typically think of as inflation is more likely to be constrained with tight monetary policy, BUT NOT ALL OF IT. Do you think interest rates have anything to do with the high cost of healthcare, or your rent? For sure, not on the former, but for the latter, it would seem that interest rates would be a factor, as landlords are likely to rely on borrowing to finance purchases. Makes sense, right? But unfortunately, higher interest rates are only causing landlords to hunker down with higher rents as they struggle to maintain profitability, if they are even profitable at all. Whatever Fed, you got it. Maybe every multifamily real estate investment made and financed when rates were like 0%, whose variable-rate loans will readjust this year, will have to be fire-sold and the new investors will be able to afford to keep rates from rising. Maybe.

So, here we are, a few years later when pandemic-borne, supply-based, or cost-push inflation has dissipated, and demand-pull inflation too has cooled down (thanks to higher interest rates). Now we must contend with regular inflationary forces, like simply, everyday supply and demand stuff. Remember from before the pandemic when no one even thought about inflation? Yah, that went away way back in the 1980s, right? Well, in reality inflation always fluctuates, but within acceptable tolerance levels. A big driver of that is Mother Nature. Crop yields, weather, blight, etc.

Speaking of weather. I spent some time with my energy industry friend over the weekend, and guess what? We discussed, as we always do, where energy prices were heading. He quickly reminded me of Hurricane Beryl which, as you are reading this, is bearing down on Texas’ gulf coast. You know, the coast where all the important stuff happens. So, first thing this morning, WHILE YOU SLEPT, I decided to do some research myself, and here is the map that tells it all. Have a look then follow me to the close.

I know that this is busy map, but it is for a reason. There are a lot of energy assets right in the path of the hurricane! You can see all the natural gas pipelines in orange and blue. Also, on the map (the various dots) are natural gas hubs, refineries, storage terminals, seaports, liquid natural gas berths, etc. There are already reports of LNG refineries ramping down production ahead of the storm, which has already caused LNG prices to inch higher. What is my point here? Events like these can and will impact what we pay for energy. Unfortunately, the Fed, and its interest rate hammer cannot control this. It can make other things cheaper by lowering rates and lessening the blow, however. This is supposed to be a long hurricane season, and I am sure that this is not the last map I will share with you this summer.



  • No major economic releases today. Later in the week we will get Consumer Price Index / CPI, Producer Price Index / PPI, University of Michigan Sentiment, and the start of earnings season. Download attached, economic and earnings calendars for times and details. There are also some important Fed speeches this week, including Chairman Powells testifying on Capitol Hill.


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