Energy Report: The Dot Plot Thickens

Global oil prices are holding up better than most commodities as the Federal Reserve starts to send signals that perhaps this inflation thing isn't transitory after all. The Fed, in their new dot plot, penciled in the probability that interest rates will increase two times in the year 2023. The reason for the “shocking change” is because Jerome Powell is seeing inflation rise much faster than he and other Fed officials expected. Powell says he now expects that shifts in demand can be large and rapid and that inflation could turn out to be higher and more persistent than we expected. Who knew that if you printed a record amount of money and gave money away for free! that it could cause inflation.

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The Federal Reserve has now raised its inflation forecast to 3.4%, much higher than the previous forecast. While the Fed still thinks that inflation is transitory and being driven by the re-opening of the economy, it is now getting a little bit nervous that these inflation expectations can be more ingrained. If inflation continues to surge, it would do more damage to the longer-term economic forecasts.

The oil price situation is especially worrisome for the Federal Reserve. Under-investment in the sector could lead to a long-term, persistent inflationary trend in the price of oil. We all know that despite the movement to get off fossil fuels, in the short term, the global economy still runs on oil. China for example just saw its refinery runs hit a record high. Reports say China is having a hard time finding enough clean fuel so they're burning dirtier fuel to meet this surge in global re-opening demand. I am sure the environmentalists are gonna love that.

The impact of stimulus around the globe and the low-interest-rate environment is further fueling the inflationary pressures. The Fed probably has the tools to cool things off and we're seeing that with just the threat that interest rates could go up eventually. Yet while the Fed is good at printing money, they are not very good at printing oil.

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