By Ronald W. Rogé, MS, CFP®
Chairman & CEO
The Federal Reserve has begun to raise interest rates in its effort to combat inflation in the U.S. which is currently 8.3%. The inflation rate in the United States has averaged 3.26% from 1914 until 2022.
We did some research on the cause of each U.S. recession since 1970. Lo and behold, many of them were preceded by problems with energy (oil and gas). Sound familiar?
The media is ripe with talking heads discussing reasons why inflation is out of control. Most are blaming the pandemic, global instability, the supply chain, etc. As we read and listen to the media babble about the cause of today’s inflation, we are reminded of the following advice from entrepreneurial coach, Dan Sullivan, founder of The Strategic Coach:
“The problem is never the problem; the problem is that you don’t know how to think about the problem.”
Is inflation really the problem? Or is it a symptom of something else? Think about going to the doctor with a symptom that’s bothering you. The doctor orders tests, diagnoses the problem, and prescribes a solution. Imagine if the doctor skipped the tests and diagnosis and went straight to the prescription. In similar fashion, the Federal Reserve (Fed) is simply reacting to the symptom without the ability or authority to address the real problem. Instead, it does what it is authorized to do with runaway prices – bring inflation down by raising interest rates until they are back to the acceptable range of 2 to 3 percent annually. Unfortunately, this usually leads to a recession because they always seem to overshoot the number of rate increases that are necessary to control inflation.
Is there something we can do to contain the number of times the Fed raises rates? There is! We can identify and deal with the real problem.
To help identify the real problem, we have been listening to a lot of smart, successful entrepreneurs, who own businesses that are on the front lines of our economy. We are hearing the same messages repeatedly about what is driving up the costs in their industry. It’s the shortage of diesel fuel.
Most things we buy must be delivered by truck, and the price of diesel fuel has gone up 73% (from $3.30 to $5.70 per gallon) in the past 12 months. These higher transportation costs are passed on to the consumer through higher prices. Yes, wages have increased, but not enough to mitigate the increase in cost of goods. The limiting factor for today’s inflation is the cost of diesel fuel.
Fixing the real problem will take political courage to first recognize the issue, and second to design a solution. Businesses will not commit capital to building the refineries and pipelines required to help solve this issue while production of hydrocarbons are under attack by a government focused on cleaning up the environment.
We all want a clean environment. However, a follow up question should be, “what are you willing to sacrifice to accomplish it?” There is always a price to pay to achieve any goal. The goal could cost you money, time, lifestyle, freedom, or security; these are all always in consideration when trying to achieve any goal.
As a nation we are beginning to embrace the electric car in a big way. Technology and convenience are constantly improving the overall driving experience, with increased mileage per charge, and the addition of more publicly available charging stations each year. However, you can’t charge the battery of your car without electricity, and electricity is mostly produced by burning hydrocarbons (oil, gas, and coal) or nuclear energy. Hydropower, solar power, and wind are helping, but they are nowhere near the capacity required to replace hydrocarbons today.
We need to compromise and create policies that will address our near-term needs, alongside our longer-term goals to eliminate hydrocarbons. We can simultaneously achieve both and help the Fed reduce the number of rate hikes necessary thus reducing the chance of putting our economy into a recession. Recessions are painful, especially for those with lower income, those retired on a fixed income, and those living from paycheck to paycheck. When that happens, then the real problem must be addressed anyway, because recessions cause additional suffering beyond the rising costs of goods and services.
Rate hikes are just treating the symptoms and not dealing with the underlying real problem. Ignoring this issue will just prolong the pain. In preparation for additional rate hikes by the Fed, we wanted to share some insight into the reasonable changes we’re implementing to the way we are allocating our portfolios.
If you would like to learn more about our strategy, or how we have been helping our clients Plan, Achieve, and Live® the life they want for over 35 years, please feel free to give us a call at 631-218-0077 or send us an e-mail at firstname.lastname@example.org.
R.W. Rogé & Company, Inc. is a fee-only financial planning and wealth management firm serving clients locally and virtually across the country, with Long Island, New York, Beverly, Massachusetts, and Naples, Florida office locations. To learn more about our company, click here.