If you listen to or read President Trump’s tweets, you will hear him say he wants lower interest rates, and the Fed should lower them. The Federal Reserve or Fed is an independent body which although hears what the President wishes, makes its decisions about the facts of how the economy is doing. Roughly speaking if the economy is not doing well, lowering interest rates is a good thing, if the economy is doing well, rising them a bit is a good thing, because the object is to keep inflation at a relatively low level. All economies have cycles, but cycles can be changed with government policies.

In an article by Colby Smith of the New York Times News Service, the Federal Reserve was struggling to get inflation to a 2% target or lower and then President Trump went to war against Iran.

Wars are inflationary because at the time of the event there is very little productivity going into the economy. Some weapons will be made, but in war you use the weapons that were produced before the engagement. The military spends excessive money because war is expensive, there are reports the war is costing the US about $1 billion a hour if you include all the activities of the military. The government suggests $1.5 billion a day, but that is low. War tends to cause inflation.

The war in Iran is causing a supply shock to the world’s use of oil and gas. As a commodity, when the price rises on the exchanges it affects all countries with higher prices. Whether the country is an importer or exporter of the commodity. The rise in oil prices means everything connected to oil and gas – which is many products – will go up. When the prices go up, inflation rises.

The issue is how long will the war cause oil prices to rise. This particular war is causing the producing, the storage, the transportation and the usage of oil and gas to be all effected, which implies if the war was over there would be a time delay before what is considered normal to return. The producers had to lower or stop production and that does not start overnight. The ships have to go and come back, the storage facilities have to drop levels, logistics matters.

The Fed typically disregards swings in energy prices because it often takes a significant, long-lasting shock to fundamentally change the economic outlook.

Allan Detmeister, a former Fed economist now at UBS estimates for every rise in $10 for the price of a barrel of oil translates to 0.05% uptick in core inflation.

The real problem with the increase in the oil price is the cost of gasoline and other affected prices means the consumer has fewer choices and people tend to pull back on spending in general. Goldman Sachs economists believe for every $10 increase in the price of a barrel of oil, the GDP or economic growth will fall 0.1%.

Linking to dividend paying stocks, if you own oil and gas stocks, they will make windfall profits and increase share buybacks and continue to pay dividends. For the rest of the market, for consistently profitable companies they will likely be able to deal with the upheaval. For those in debt, it is good to look for alternatives.

There are more questions than answers, till the next time – to raising questions.