What Does The Fed’s Pause On Rate Hikes Mean For Commodity Prices?

Global Monetary Policy Analysis

This week is all about Global Monetary Policy with trader’s attention firmly focused on the outcome of Fed Chairman Jerome Powell’s Testimony, the Bank of England’s interest rate decisions, along with details of trillions in new economic stimulus spending from the People’s Bank of China.

Taking front and centre stage will undoubtedly be Federal Reserve Chairman Jerome Powell’s two-day testimony before the House Financial Services Committee and the Senate Banking Committee.

The timing of Jerome Powell’s testimony comes at a very pivotal moment in monetary-policy history – following the FOMC’s decision last week to hit the pause button for the first time in an aggressive 15-month-long interest-rate hiking campaign.

As widely expected, the U.S central bank held its benchmark rate steady after 10 consecutive interest rate increases. But it also signalled it would need to squeeze the world’s largest economy much more before the year is out in order to get a handle on stubbornly high inflation.

Rather than raising rates just once more by a quarter basis point, as had been widely anticipated, most Fed officials are now forecasting there will have to be multiple further increases this year – bring back memories of the serious policy errors made by the Paul Volcker Fed in the 1970s.

A premature pause in the fight against inflation back in the 1970s – led to a prolonged period of high inflation that required even tighter monetary policy, which eventually resulted in the most severe global recession since World War 2.

As proven through history, the more times central banks pause rate hikes, the longer the problem goes on. Inflation becomes more embedded and less sensitive to rate hikes – ultimately making it harder to tame.

According to Goldman Sachs; skipping a rate hike could prove to be the biggest mistake the Fed has ever made. Inflation won’t come down as quickly as policy makers would like markets to believe.

The House and the Senate committees will inevitably grill Jerome Powell over the Federal Reserve’s decision to take a break after 10 straight interest-rate increases. Also evaluate whether the July FOMC Meeting is truly ‘live’, and if the Fed’s hawkish stance favouring further rate hikes is truly data dependant or more aspirational.

Elsewhere, the Bank of England is scheduled to raise interest rates by a quarter point to a 15-year high of 4.75%, when policymakers meet on Thursday. Traders expect the British central bank will raise rates well above 6% this year, to the highest level since 2000.

Meanwhile, another high-impact event that traders will not want to miss, is China’s hotly anticipated announcement to unleash trillions of dollars in stimulus spending over the next few months to reinvigorate the world’s second-biggest economy. Expectations are climbing that an economic stimulus package out of China could “inflate everything” – whipping up a new inflationary storm that sends Commodity prices skyrocketing to fresh record highs.

Commodity Price Forecast

Extraordinary times create extraordinary opportunities. When you consider the full magnitude of events that are currently unfolding, then the case for Commodities in a well-diversified portfolio has never been more obvious than it is right now!

Where are prices heading next? Watch The Commodity Report now, for my latest price forecasts and predictions: