What Would Another Fed Policy Error Mean For Commodity Prices?

Phil Carr
Published: Feb 23, 2024, 18:38 UTC

The Federal Reserve under Chair Jerome Powell might never live down its misguided insistence on “transitory inflation” and its delayed decision to raise interest rates.

In this article:

Debate on Wall Street: Is the Fed Making a Major Policy Error?

Now, some of the world’s most powerful Wall Street institutions are convinced the U.S. central bank is once again – making another major policy error by waiting too long to start cutting rates and thereby increasing the odds of a hard landing for the economy.

According to Wall Street economists, though economic strength has kept a U.S recession at bay, a downturn could still happen if the Federal Reserve‘s constrictive monetary policy stretches on for longer than necessary.

While a slowdown is guaranteed, the odds of a recession currently stand below 50%. However, that balance could very quickly tip in the wrong direction, if the Fed hesitates to cut rates sooner rather than later.

Bets on lower rates coming soon were so prevalent prior to the Fed’s January meeting, which spurred Jerome Powell to caution that policymakers were unlikely to be in position to cut as of March. Now traders have not only removed March as a possibility, but have also started to price in that the Fed is going is going to make a mistake.

At the same time, an equally hot debate is raging that perhaps the next shift isn’t a cut at all.

Dilemma at the Fed: Hike or Hold?

In recent days, Former U.S Treasury Secretary Lawrence Summers voiced an interesting viewpoint that because of persistent inflationary pressures, there was a “meaningful” chance that the Fed’s next move on rates could be an increase.

“The worst thing you can do when the doctor prescribes you antibiotics is finish part of the course, feel better and give up on the antibiotics,” said Summers.

Even if another hike is too hard to countenance, some Fed watchers are floating a repeat of the late-1990s: only a brief course of rate reductions that sets the stage for increases later.

Whichever way you look at it, one thing is clear. Jerome Powell and his colleagues at the Federal Reserve now face their biggest dilemma ever.

The big question now is will the Fed cut, hike or hold interest rates higher for longer?

Only time will tell. However, to quote analysts at GSC Commodity Intelligence – “regardless of whatever scenario plays out from here, whether that’s persistent Inflation, a recession or a Fed-induced economic shock – all the above present an extremely lucrative backdrop for Commodity prices”. That’s welcoming news for the bulls, but painful for anyone sitting on the sidelines, who must now decide how much FOMO they can handle.

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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