Fed’s Final Rate Hike Could Be Near. What Does That Mean For Commodities?

Phil Carr
Published: Oct 7, 2022, 09:03 GMT+00:00

Commodity prices surged to fresh multi-month highs this week amid growing expectations that the Federal Reserve will ease rate hikes or even bring them to an end as soon as November.

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Fed Was Late to React to Inflation

After being criticized for being slow to recognize inflation, the Federal Reserve has embarked on its most aggressive series of rate hikes since the 1980s. But in doing so, the odds of a global economic downturn have also accelerated with economist predicting that a recession is now inevitable.

And the worst thing about this major policy error is that it could have been avoided had the Federal Reserve acted sooner.

The Fed began hiking interest rates to tame sky-high inflation in the spring of this year, the first time it had done so since slashing them to zero in the early days of the pandemic. When inflation began creeping dangerously higher in 2021, Federal Reserve Chair Jerome Powell insisted that it was only “transitory” and nothing to be concerned about.

The Fed is now frantically trying to regain its credibility and make up for lost time by raising rates at the fastest pace in decades.

A ripple effect of the Fed’s “too much too late” actions have dramatically strengthened the dollar – raising further concerns among leading economists that the U.S currency will be the next asset bubble to burst.

According to Morgan Stanley – “such U.S dollar strength has historically always ended in some kind of financial or economic crisis” and that’s the exact direction we are heading in again.

In recent weeks, a long list of Wall Street banks and international organization from the United Nations, World Bank and IMF have warned that an overly aggressive Fed tightening policy, combined with a surging U.S dollar – “risks breaking the financial markets and inflicting worse damage globally than the financial crisis in 2008 and the Covid-19 shock in 2020”.

Growing backlash against the Fed comes at a pivotal moment – following a significant move from The Bank of England last week, who reverted back to unprecedented “Quantitative Easing” measures, to avert a full-blown global financial meltdown.

Pressure is now piling on the Federal Reserve to follow the Bank of England’s lead and put a brake on rate hikes.

The Fed Has No Good Options Left

Regardless of which direction the Fed chooses now, they are unfortunately trapped in a box of their own making – faced with a situation common to chess players down on their luck – stuck with nothing but bad moves to play.

On one hand, if the Fed continues hiking rates aggressively into a weakening economy, then a severe 2008-style recession is virtually assured. On the other hand, if the Fed changes course on rate hikes, that will inevitably lead to entrenched inflation. That toxic combined with an economic downturn would lead to 1970s-style stagflation – an even worse outcome for the global economy.

The big question now is will the Federal Reserve be next to announce a major policy U-turn?

Only time will tell, however, the one thing we do know is that extraordinary times create extraordinary opportunities and right now, this market is a traders paradise – packed with endless money-making opportunities, almost on a daily basis!

Commodity Price Forecast Video for October 7, 2022

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About the Author

Phil Carrcontributor

Phil Carr is co-founder and the Head of Trading at The Gold & Silver Club, an international Commodities Trading, Research and Data-Intelligence firm.

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