At the start of the CNBC show “Fast Money” Friday, trader Steve Grasso hypothesized that higher oil prices could prove deflationary in that it was due to a supply shock and consumers, with only so much to spend, would divert dollars from areas where the Fed derives its key inflation inputs to gasoline and other energy-related expenses which core inflation gauges exclude. While the other hosts didn’t outright laugh at his thesis, they weren’t buying it. But it wasn’t until guest economist Mark Zandi came on that Grasso’s musings were vociferously repudiated. Now, I don’t know about you, but there are few things that make me cringe more than when an economist avers an iron clad economic law. I don’t dispute high oil prices’ natural transmission into higher prices more broadly, but economic relationships are rarely so mechanical. Energy shocks historically bring an initial inflation impulse followed by demand destruction as higher input costs sap global growth unless conditions precipitating the supply shock are quickly resolved. Policymakers appear to understand this nuance even if television economists do not. Treasury Secretary Scott Bessent noted last week that “the crude markets are very well supplied…there are hundreds of millions of barrels on the water away from the Gulf,” and that the administration is working with global producers and consumers to maintain stability in energy markets. In other words, even as prices spike, policymakers are signaling that markets should not extrapolate a lasting shortage. Trump continues to insist the war may soon be over. Even if Trump and Bessent are wrong and high oil prices persist, the 1970s taught us that the first phase looks like stagflation—but the second phase often devolves into recession and disinflation. If spiking energy prices wreck the global economy, the world should quickly fall into economic contraction and disinflation (if not outright deflation). And if the Fed, which should already be increasingly concerned about the sagging employment picture, needs to act, it should be working to forestall recession particularly at a time of war, rather than worry about inflationary pressures due to a supply shock which its tools can’t address. Lower rates would encourage quickened oil patch investments. Recall a key byproduct of the ZIRP years was to spur massive fracking expenditures that allowed the U.S. to become the world’s largest oil swing producer. While prediction markets have the odds of a Fed March cut priced near zero, it’s not lost on us that Bitcoin, one of the most risk-on and liquidity sensitive instruments out there, rallied over 4% yesterday despite the recent anti-liquidity developments of a higher dollar, higher MOVE index and higher oil prices. While that does not mean you should be betting on Kalshi for a March Fed cut, it does argue that markets expect liquidity to ramp up meaningfully in the very near future and that will be good for risk-on in general and small-caps in specific.