The “strong economy” — as Jay Powell, chairman of the Federal Reserve, describes it — can “flourish in the face of a less accommodative monetary policy”. True, but only if that policy, already too late, is not also too little to rein in inflation. And if it is accompanied by an energy policy that does not dry up oil supplies in an ill-conceived, hasty transition to a greener economy. On present reading, neither is available.
The oil-supply requirement is not limited to finding more barrels to tame the escalation in crude and petrol prices — a shock that Joe Biden is trying to hang on Vladimir Putin, even though prices were heading up before Putin turned his artillery on Ukraine’s cities. Biden wants to meet the current short-term supply tightness, and politically disturbing run-up in petrol prices, by rattling his beggar’s bowl at Iran’s ayatollahs, Venezuela’s Nicolás Maduro and Saudi prince Mohammed bin Salman (MBS). “Please sir, I want some more.”
The prospect of helping to end human rights abuses by Putin seems insufficient to evoke a positive response from these despots. Besides, the ayatollahs’ price, which Biden might yet pay, is a free hand to develop a nuclear weapon; Venezuela’s investment-starved oil fields cannot readily increase output; and MBS is understandably upset by the administration’s policy lurches, which would end US support for Saudi offensive operations in Yemen, and ease sanctions on its blood-enemy, Iran. Oh yes, Biden’s promise to turn MBS into “a pariah” has not inclined him to take calls from the president. Words matter.
The domestic industry can and will step up production, which energy secretary Jennifer Granholm is exhorting executives to do — “hire workers … get your rig count up”. Unfortunately for her efforts at detente, at the same time Biden is accusing the oil barons of “price gouging”, and other administration spokesmen are announcing that after extinguishing this “fire in the kitchen”, the rest of the house will be converted to “renewables and clean technologies.”
Little wonder that capital spending by exploration and production companies fell from $529 billion in 2019 to $314 billion last year. Rational investors have little appetite for developing resources that Biden’s team want left in the ground. By his actions they have judged his plans for their future.
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On taking office, Biden barred completion of the Keystone XL pipeline, which would have brought more Canadian oil to America than we received from Russia. He became the first president not to have a sale of onshore oil leases during his first two years in office. He has done his best to stop the fracking that has made America a net exporter of oil. Even supporters of those policies quail at the pace at which the administration is attempting to eliminate fossil fuels.
As for Powell, the tools he is using to bring inflation down to 4.3 per cent this year and 2.3 per cent in 2024 – 11 (presumably) one-quarter percentage-point interest rate increases spread over this year and next — would leave real, inflation-adjusted rates in negative territory for a good long while. Interest rates lower than inflation rates make money free, which shouldn’t slow the demand side very much, if at all. Meanwhile, Powell is gambling that supply constraints will prove, er, transient— a gamble that will pay off only if Luck is a very kind lady, indeed.
Larry Summers, who served President Clinton as treasury secretary, beat Powell’s announcement to the desks of Washington Post writers: “I believe the Fed has not internalized the magnitude of its errors over the past year, is operating with an inappropriate and dangerous framework, and needs to take far stronger action to support price stability than seems likely.” Stagflation or recession to follow.
Powell often refers to the “uncertainty” he must face. That’s true, for him and for all policymakers at all times. But there are also certainties.
The 10 per cent rate at which wholesale prices are rising will push up the current 7.9 per cent rate at which retail prices are rising.
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Labour shortages are likely to speed up the emerging wage-price spiral.
The usual flow of nickel and other materials from Russia is interrupted, and has already forced Elon Musk to raise the price of his electric vehicles.
Higher fuel prices are rippling through the economy, driving up transport and manufacturing costs.
No wheat will be planted in Ukraine this planting season, meaning shortages and higher prices are baked in.
Supply bottlenecks aren’t going away.
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The real pity is that too little, too late from the Fed, and a too-much, too-soon energy policy from the administration, would be unforced errors. The economy is strong enough for the Fed to tighten faster and harder without taking an out-sized risk of causing a recession. And our energy resources are sufficient to allow Biden to organise a sensible glidepath to a greener world. It is, after all, not necessary to damage the great American economy in the process of preventing the planet from overheating.
Irwin Stelzer is a business adviser
