Oil Prices Continue to Drive Inflation
The Weekend Edition is pulled from the daily Stansberry Digest.
Follow the oil...
On September 16, the Federal Reserve raised the federal-funds rate for the first time in three years, to a range of 3.75% to 4%. The next day, Treasury yields fell, and stocks rose.
What gives?
Well, the market expected a rate hike. And although Fed Chair Kevin Warsh's post-meeting press conference stoked some volatility on Wednesday, the market made up those losses on Thursday.
Ultimately, it was developments in the Iran war that drove the Fed's decision...
Higher energy prices are a big deal. Roughly six months into the war, those prices are filtering downstream throughout the economy. As Nick Koziol wrote in Wednesday's Digest...
In his statement, Warsh took a "hawkish" stance on continuing to fight inflation, saying that recent inflation releases – like [the prior] week's consumer price index ("CPI") – show that underlying inflation trends haven't improved. He added that too many inflation components are running above 3%.
Those comments indicate that more hikes could be on the way if inflation doesn't come down meaningfully.
That's not what the market wants to see.
The market wants to see a positive development... even if it's only a temporary fix.
On Thursday, it got one. Futures for U.S. crude declined by 1% to around $101 per barrel, and Brent crude traded down around 2% to around $104.
With the Houthis disrupting passage from the Red Sea, Saudi Arabia has reportedly decided to make more crude cargoes available to Asian refiners through a "safe" (for now) port in Oman that avoids the Strait of Hormuz.
This is just a short-term "fix." But Mr. Market is nothing if not a knee-jerk reactor – or a voting machine in the short run, as Warren Buffett once said, borrowing from his mentor Benjamin Graham.
Uncle Sam Steps In
Here comes government demand for oil...
In an interview with Bloomberg TV on Monday, Energy Secretary Chris Wright said his department will begin refilling the Strategic Petroleum Reserve ("SPR") "in the next few months."
In March, the SPR hit a three-and-a-half-year high of roughly 415 million barrels. But then the U.S. began tapping those reserves to lessen the impact of supply disruptions.
As of September 4, the SPR sat at 285 million barrels – its lowest level since 1982.
Earlier this month, we wrote that the government had a deal in place to receive 65 billion barrels of oil from Venezuela.
However, there are hurdles – like Venezuela's slow production. Plus, the crude from that region needs to go through extensive refining before reaching the quality needed to be stored in the SPR.
Whether we get Venezuelan oil or not, it's going to take a while to refill the SPR.
And the bill to refill the tank is growing...
In March 2025, when the SPR sat at about 400 million barrels, the Department of Energy estimated that it would take about $20 billion and several years to fill the SPR to around 700 million barrels.
At that time, West Texas Intermediate crude was trading for around $70 per barrel. Today, West Texas Intermediate crude is around $100 per barrel... And the SPR has roughly 100 million fewer barrels.
Filling the SPR back up to around 700 million barrels would cost more than $40 billion.
That could add to the inflation problem...
In August's CPI, the energy component jumped more than 16% year over year – led by a 27% spike in gasoline and a 52% surge in fuel oil. And it'll be at least six months before the year-over-year comparisons for inflation start to account for 2026's spike in oil prices.
High inflation will make the Fed's job even harder.
Trump responds to the rate hike...
And it could have been worse.
President Donald Trump spent the past few weeks lobbying for lower interest rates, but – as we mentioned above – the Fed still went the other way.
Afterward, Trump took to Truth Social to call for lower interest rates. His response was predictable... and nothing new.
What Trump didn't do is more interesting. Given his stance on rates, a hike was likely to draw Trump's scorn. But speaking with reporters, Trump said he still has confidence in Warsh.
So far, Trump's grievance isn't with the Fed chair but with the rest of the board.
However, Wednesday's rate hike may be just the beginning.
Expect Higher for Longer
A new rate-hike cycle has likely begun...
But it hasn't been totally "priced in" to the market yet.
In the projections the Fed released alongside the decision, the median expectation is for the fed-funds rate to be 4.1% at year-end. That would mean one more quarter-point hike before December.
In Wednesday's issue of Credit Opportunities, our colleague Mike DiBiase explained how government policy fuels inflation and why the Treasury's recently announced plans to increase bond buybacks won't help...
The most reliable inflation predictor is accelerating. In the latest reading in July, the M2 money supply increased by 5.4%, the biggest year-over-year increase in 49 months.
In June 2022, the central bank was in the middle of its fastest rate-hiking spree in decades to "fight" decades-high inflation. Over the next year, the effective fed-funds rate went from 1.21% to 5.08%.
Now, the Fed has just made its first rate hike in three years... And benchmarks for inflation are closer to 3% than the central bank's stated 2% goal, which Warsh said he wants to return to on a "timelier" schedule.
The pace of inflation is already warm, and the sources of inflation are getting hotter. So prices could be on the verge of a big move higher.
I'm not saying rates will go up another 4% from here. The gap between the Fed's goal and inflation readings is smaller now than it was four years ago.
But directionally, we're in the same position today. We're in an environment where it's wise to expect higher interest rates.
All the best,
Corey McLaughlin with Nick Koziol
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