By: Russ Kamp, Managing Director, Ryan ALM, Inc.

Yogi Berra may or may not have actually said the words in the title of this post, which were supposedly uttered during the New York Mets pennant run in 1973, but that phrase is perfect for describing today’s inflationary environment. There has been great progress in driving down the headline inflation as measured by the CPI, which now stands at 3% having peaked at >9% in 2022. However, core inflation, which measures the change in prices of goods and services, except for those from the food and energy sectors, may just prove to be more challenging. Core inflation currently sits at 5%, a level that far exceeds the 2% target established by the Federal Reserve before they declare victory.

One of the key factors contributing to the Fed’s success in driving down the CPI has been the significant fall in the price of oil. As you may recall, the price of a barrel of WTI crude oil peaked on June 6, 2022 at $120.67. It currently resides (10:03 am EST) at $76.52 which is a fall of -36.6%. Since petrochemicals derived from oil and natural gas are used in the production of >6,000 everyday products, this significant decline in the price of oil obviously goes a long way to mitigating inflation. But, one must ask, has the price of oil peaked and will the slide in price continue or will OPEC and other factors potentially disrupt this favorable trend?

There recently has been an uptick in the price of WTI, which stood at $70.64 on June 30, 2023. At $76.52 today, WTI is up 8.3% MTD. I mention this trend because bond investors seem to think that the Fed has accomplished everything that it set out to do when it first increased the Fed Funds Rate on March 17, 2022. The subsequent 10 rate increases have meaningfully addressed inflation, but as we witnessed in the 1970s, declaring victory prematurely can bring about a swift reversal of fortune.

This recent price movement in oil may just be a temporary blip in the trend of falling prices, but it may not be, too. If in fact inflation is pushed higher because of the impact from a rising crude oil price, will the Fed be forced to push US interest rates higher for longer? The market’s recent bond rally will certainly be challenged should that be the case. Again, we ask, do pension plan sponsors and their advisors want to be in the game of guessing where rates are going? US interest rates are now at a level that we haven’t seen in about 15 years.

Use the higher rates to secure a portion of your benefits and expenses chronologically. Improve the liquidity needed to meet those obligations. While achieving greater certainty regarding the plan’s liquidity, you are also extending the investing horizon for the plan’s growth assets. Bonds should be used for their certain cash flows of interest and principal. They are not performance drivers. Match those cash flows against the pension system’s liabilities. You will no longer need to worry about US interest rate policy. That’s comforting!