Hello Pro Farmer Members!
Citing “recent global economic and financial developments” (read that China), the Federal Open Market Committee left interest rates unchanged this week. In addition to the global economic concerns, the Fed would like to see “further improvement in the labor market” and be “reasonably confident” inflation will rise before raising rates.
Reading between the lines, the Fed is more worried about (global) deflation than inflation. Therefore, it seems unlikely China’s economy will improve enough and inflation will rise enough for the Fed to make a monetary policy move this year. In fact, that’s what the market is now factoring in. Fed fund rate futures now imply less than 50% odds of a 2015 rate hike. Barring an unforeseen change of events, it looks like it will 2016 before the Fed will start to raise interest rates.
The Fed’s monetary policy stance obviously matters to the U.S. economy as a whole, but what’s the importance for commodities and ag markets?
While a Fed rate hike would likely support the U.S. dollar, which would tend to be price-negative for commodities, commodities and the Federal Reserve’s fund rate have proven to have a positive correlation over the years. When the Fed has raised interest rates, commodity rallies have followed. During periods of Fed rate cutting, commodities have tended to struggle. The general belief is that the Fed would not raise its rates unless it sees periods of sustainable economic growth. Conversely, the Fed typically only lowers interest rates when the economy is struggling. That’s why interest rates the commodities typically trend together.
With the Fed more focused on global economic developments, it only makes sense that a commodity price rebound should follow the eventual raising of U.S. interest rates. But with the Fed likely in pause mode until sometime next year, a rebound in commodities may also be on hold. It appears China may be the key to when the Fed decides it’s time to raise interest rates and when commodities get a boost in demand needed to put in a bottom.
That’s it for now...
... have a great weekend!
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