Today’s announcement by Federal Reserve Chair Ben Bernanke, keeping interest rates where they are while buying $600 billion of Treasuries through June, should mean good news for agriculture.
The announcement is no surprise—most analysts expected what was dubbed “QE2” because it is the second round of “quantitative easing,” though the consensus figure was $500 billion.
The practice is controversial and economists and monetary policy analysts question whether it will achieve its goal of boosting employment.
However, “the Fed is out of economic arrows in its quiver,” says Dan Basse of AgResource. “By buying Treasury debt, they remove some of it from the market and at the same time, put new money into the economy, hopefully boosting monetary velocity.”
This infusion of dollars could boost inflation, which is actually one of the goals of the Fed, which believes that inflation in the 2% area is needed for economic growth. “The definition of inflation is more dollars chasing fewer goods and this strategy in theory will do that,” says Basse. That prospect will drive more speculative money into commodities, he adds. “This bodes bullish for all commodities.” Listen to Basse's full comments.
At the same time, putting more dollars into circulation means the dollar is cheaper. Since August, when Bernanke said the Fed would do “all it can” to keep the recovery going, the dollar index has dropped 7%. That’s good news for U.S. ag exports since it makes our products cheaper to those buying in other currencies, but makes imports—such as fertilizer—more expensive to U.S. farmers.