Ingrams September 2023

IN A NUTSHELL

by Ken Herman

Clouds Move in From Multiple Fronts

With disappointing news arriving, how will the Fed respond after a long run-up in interest rates? The Fed’s decision to leave rates unchanged earlier this month was accompanied by hawkish communication sig naling a propensity to hike at least one more time this cycle. Treasury yields rose across the curve throughout the afternoon, but it is still too early to determine whether the capital markets believe what the Fed is selling. There is still one more hike implied by the 2023 forecast, but the way

a year, driven by a nearly 11 percent increase in retail gasoline prices. A weakened Chinese economy was also thought to reduce global oil demand, but supply appears to be the bigger problem, with oil and gas companies quick to point out regulatory restric

Chairman Jerome Powell talked about rates—less about “future increases” and more about forecasting humility— suggests the committee is open to the idea of ending hikes this year. The Fed seems to have added enough pressure on financial conditions with out fallout for growth and employment, at least when compared to previous U.S. inflation battles. That has led the market to price in an economic soft landing, helping prop up stocks for much of the year, contrary to many of the initial forecasts on Wall Street. The key question now is whether that can keep going. Have the 525 basis points in interest-rate hikes delivered since March 2022 already filtered thro-

tions on their sector. While rel eases from the Strategic Petrol eum Reserve were commonplace in 2022, when Russia began its invasion of Ukraine, those drawdowns have brought SPR sup- plies to their lowest level in 40 years. If WTI crude would top $100 per barrel, the Biden admin-

The Fed seems to have added enough pressure on financial conditions without fallout for growth and employment, at least when compared

to previous U.S. inflation battles.

ugh the economy? Will things hold up if those levels are held through 2024? What about other possible curveballs like higher energy costs, student loan repayments, damag- ing labor strikes or a government shutdown? The Energy Factor Oil prices have crossed $93 per barrel for the first time since November 2022, sending ripples through many parts of the economy. There are a variety of reasons for the upward climb, most notably the recent production cuts by Saudi Arabia and Russia. However, the pace at which oil is ascending is becoming a bigger topic of discussion. After remaining below $80 per barrel for most of the year, West Texas Intermediate crude broke above that level this summer—and has soared more than 17 percent over the past several weeks, helping to raise costs on everything from transportation to manufacturing. Resurgent energy prices are a particular headache for the White House, which was celebrating some minor wins on the inflation front. Then came word that U.S. con- sumer prices in August rose by their most in more than

istration would likely consider ad- ditional releases, but until then, there are some other options under consideration. Regular discussions are taking place with domestic producers and refiners, as well as international options such as easing restrictions on exports from Iran or Venezuela. If, as Wall Street expects, there is still one more rate hike in 2023, it will indicate the Fed is leaning toward a November hike. A hike at the November meeting would main tain the current tightening pace of a quarter-point increase at every other meeting, and it could leave room for one more hike before year-end if the data starts flashing red hot. Not that anyone expects it will … but the Fed always likes to be ready to go.

Ken Herman served as the Managing Director of Bank of America Global Capital Markets and was the Mayor of and served on the City Council in

Glendora, Calif. E | Editorial@

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September 2023

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