Due to the highest rate of inflation in 40 years, the Federal Reserve raised interest rates this week to 0.5%, the largest single rate hike since 2000. Historically, the Fed raises or lowers rates by 0.25%.
The reason for the larger hike was that the Fed was simply reaffirming its intention to be more aggressive in the fight against inflation. And the vote to raise rates was unanimous – with more rate hikes to come in the months ahead.
According to Investopedia: “When the Federal Open Market Committee changes the interest rate, it impacts both the economy and stock markets, as borrowing becomes more or less expensive for individuals and businesses. Any impact on the stock market from a change in interest rate movements is usually felt immediately, while for the rest of the economy it can take around a year to see a widespread impact.
Historically speaking, higher interest rates tend to negatively impact corporate earnings, stock prices and commodity markets in general. There is nothing optimistic about higher rates, which is why the Fed uses this tool to fight inflation.
However, Investopedia is correct that “for the rest of the economy, it may take about a year to see a widespread impact.”
How did a handful of commodity markets perform on the day the Fed hiked rates the biggest in 20 years?
Crude oil prices jumped more than $5 a barrel. Cotton prices posted new all-time highs near $155.
Prices for lean pork were significantly higher. Wheat prices jumped 31 cents a bushel, and soybeans 10 cents.
Gold rose $13, silver gained 36 cents and copper rose 900 points. And major commodity indices were significantly higher, with the Goldman Sachs index gaining a whopping 2,300 points.
Higher interest rates may be bearish, but that certainly wasn’t seen with commodities, per se, on the day the Fed hiked rates in an aggressive move.
However, it’s true, and history clearly shows that an interest rate hike “can take about a year to see a widespread impact,” according to Investopedia.
But why commodities, per se, did so well on the day the Fed raised rates is clear to me: markets are always more worried about today than tomorrow.
And today, in the world of raw materials, there are vast shortages and weather problems across the globe.
A strong wind favorable to inflation was announced on 6 May. The U.S. economy added more jobs than expected in April due to an increasingly tight labor market despite soaring inflation and fears of slower growth due to rising unemployment rates. higher interest.
The US labor market is quite strong, as shown in the April jobs report. For more than 75 years, economists have adopted the Phillips curve according to which inflation and unemployment have an inverse relationship.
Higher inflation is associated with job creation – lower unemployment – and vice versa. Thus, the April jobs report showing more jobs created hints of even stronger inflationary pressures.
History shows that the Fed usually gets what it wants, which is why you don’t fight them.
From thebalance.com: “‘Don’t fight the Fed’ is an investing mantra that suggests investors align their asset allocation with the interest rate actions taken by the Reserve Board of Governors. federal.”
CNBC quoted Fed Chairman Jerome Powell as saying, “Inflation is way too high and we understand the difficulties it is causing. We are acting quickly to bring it back down. We are firmly committed to restoring price stability.
“That will likely mean, based on the president’s comments, several 50 basis point rate hikes ahead, but likely nothing more aggressive than that,” CNBC reported.
Powell said “the US economy is very strong and well positioned to handle tighter monetary policy.” He added that he expected a “soft or soft” landing for the economy despite tighter monetary policy.
There is no doubt that the Fed will get what it wants. He wants lower inflation. However, it may be a year before inflation slows to the point where the Fed is happy with its policy.
But until then, markets always worry about today before worrying about tomorrow. And today the economy is robust, inflation is burning with shortages of most basic commodities.
The raging war in Ukraine will impact grain and crude oil prices more than most realize. In such a bullish scenario, I cannot be bearish for commodities today.
Tomorrow is another story.