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Energy Prices’ & Interest Rates’ Response to Conflict in Ukraine
Today we are going to be talking about some big developments in the energy sector, especially in light of the events in Ukraine. We are also going to be talking about the Fed’s job of trying to increase interest rates in this environment, and close with a few practical tips on what you can do in light of both of these topics.
Starting off, there have been some major developments on the energy front. In the month of January, for the first time ever, US Exports of liquified natural gas to Europe exceeded Russia’s according to the Wall-Street Journal reports. Additionally, according to the journal, the US remains the world’s top oil producer, even exceeding Saudi Arabia and Russia. Could Americans who endured the oil embargo of the 70’s have been able to dream about such a statement? People were standing in line for gas noticing how dependent we were on other countries for our energy consumption, yet here we are energy independent and the world’s top producer of oil and natural gas in 2022. The title of this Wall-Street journal article is apropos – “America Takes Pole Position on Oil and Gas”. Remember that this was not the case as little as 20-years ago. But the run up in oil prices following Hurricane Katrina incentivized technological innovation that unlocked oil and gas deposits in shale previously inaccessible through the a new process called hydro-fracking. This innovation has literally changed the world – especially in light of recent events in Ukraine and their implications for energy costs. Just because we are doing a really good job of getting oil and gas out of the ground in the US, does that mean that prices for energy are not going to go up? Unfortunately, energy costs are likely remain elevated and may even become worse. But they would be even higher if the US were not in position to provide an astounding amount of the world’s energy. And the energy landscape continues to evolve. Green energy is certainly a priority for the current administration, and yet the war in Ukraine exposes that you can’t just turn off fossil fuel production overnight. This means we are likely to see a continued push toward clean energy production including electronic vehicles while also continuing to see fossil fuels prominent in supplying the world’s energy. This transition is not going to be the flip of a switch, but a gradual process with interruptions and bumps along the way. Regardless, the US is sitting in a strong position as the current leading energy supplier for the world.
Let’s talk about the Fed and the difficult job they have ahead as they try to navigate this difficult environment. They are already calculating how much to increase interest rates this year, and now must do so in the midst of a major world conflict that we don’t know how it is going to end. The market has dialed back its expectations of a .50% Fed Fund increase at its upcoming meeting in March. But additional increases beyond march are almost certain for the next three meetings, although there is much disagreement over whether the Fed raises 1% total this year, or as much as 1.75% to 2%. Now longer-term interest rates have already been going up, but they have moderated recently and even come down just a bit after a quick increase – particularly in the area of mortgage rates. 30-year rates are hovering around 4% right now. A year ago, they were slightly below 3%. With the war in Ukraine adding additional stress on the supply chain, it would not be a surprise to see inflation accelerate in the short-term. However, the second half of the year could look very different as the rise in interest rates begin to affect the economy and starts to affect people’s ability to buy. The Fed is walking a tightrope in trying to slow the economy down enough to reduce inflation while not slowing it so much that it pushes us into recession. It’s track record in staying on this tightrope on the past has not been great – so a recession somewhere down the road is a distinct possibility. How far down the road is anyone’s guess, but recession risks are definitely higher than they were two months ago and continue increasing by the day.
How do increasing energy costs potentially increasing interest rates affect how you are going to make decisions? Well we have three practical tips that can help you moving forward.
Plan ahead for a higher gas budget. An increase in your expenses in one area should lead to a decrease in another – so look for areas of your budget to cut in response to potential $4 gas or higher in the near future. Don’t reach for the credit card to fuel your higher gas costs. That is often a natural reaction, but it is just delaying the inevitable making you pay the higher costs down the road and likely paying interest on those costs. When inflation happens, something has to give. So don’t get caught off guard. Think through how you will fund higher costs to fill up at the pump.
Don’t assume you need to stay ultra short on your CDs. In a rising rate environment, most people want to stay in 6 month CDs or maybe even in their savings accounts while they wait for rates to go up. But interest rates on CDs may not go up as fast as the rest of the market. Banks are flush with cash and have less need for deposits than they have in previous interest rate increase cycles. Sometimes you are paid enough of a premium to lock in a longer term CD, such as a 3-year or even 5-year CD. You have to figure up the premium you are being paid to lock longer, and then see how far rates would have to rise in order to make the same by staying in a short-term CD. To sum it up – don’t assume that shorter is better on your fixed income investments. Rates may rise, but they may not stay there for as long as you think.
If you are a small business, stay focused on your bottom line. It’s easy to see an increase in sales and assume that your business is doing better. It is currently tax time, and now is a great time to evaluate how your business really did in 2021. With costs rising, it is possible that you do more in revenue but actually make less money. Watch your bottom line, not just your top line. My best guess for your small business is that 2022 will be a good year for most small businesses, but not as good as 2021 was.
Perhaps you are a small business that needs to do some renovations on your building while interest rates are still relatively low. We’d love for you to give us a call to talk about it. At MBC/Foundation Bank we value advice and service – not just money. We want to listen to what you are trying to accomplish and give you ideas on how to get there. We want to be an informal business partner to help you make better decisions for your business’ finances. Start your financial conversation with us today exploring our website or calling your local branch. If you’ve found this podcast helpful, we hope you will share it with your friends and family and subscribe on your favorite podcasting app, and until next time… God bless.-President Chad P. Wilson, CFP
Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of McKenzie Banking Company / Foundation Bank on March 1, 2022. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. MBC/Foundation Bank is an Equal Housing Lender, Member FDIC.