Another Fed Surprise… What Does It Mean For Commodities?
Once again, Federal Reserve Chairman Ben Bernanke has the markets in a tizzy…
His surprise Wednesday announcement that the US central bank will link interest rates with numerical unemployment and inflation targets left economists with their jaws on the floor.
Why’s Bernanke’s statement such a big deal?
The Fed’s new policy assures interest rates will stay near zero until the US unemployment rate hits 6.5% or inflation rises to 2.5%. As you may know, the Fed’s previous plan was to keep rates low through 2015.
It may sound like semantics, but the policy change is a big deal!
Let me explain…
In order for the US unemployment rate to hit 6.5% any time soon, employers would have to add around 300,000 to 400,000 jobs a month to the US economy. Compare that to the measly 146,000 jobs added last month and you’ll realize hitting that lofty job goal won’t be an easy task.
As a matter of fact, take a look at this long-term monthly employment chart from Bloomberg, and you’ll find the US economy only added 300,000 jobs a month once since 2009…
As you can see, the Federal Reserve already has the pedal to the metal, yet job growth is painfully anemic.
What’s going on here?
In my humble opinion, Washington politicians have introduced too much red tape to the employee hiring process. It has become a risk for employers, especially small business owners, to hire additional employees.
As a result, I’ll go out on a limb and say US job growth will still be stagnant, even with Wednesday’s unprecedented Fed policy changes.
And guess what that means…
The Fed will keep interest rates in the basement, and keep pumping billions into the US economy via Quantitative Easing (QE), much longer than anyone anticipates. As long as Washington stands in the way of job growth, US employers will likely keep their hiring to a minimum.
Of course, extended periods of ultra-low rates and QE is bad news for the US Dollar.
As many readers are likely aware, the dollar is already at risk of dropping off a cliff. The Fed’s new interest rate policy could be the unexpected gust that finally pushes it over the edge.
And you know what that means for commodities…
Since zero interest rates and QE will likely last into 2014 (at the very least), the dollar will be hard pressed to hang on in 2013. And since commodities generally move opposite of the dollar, we’ll likely see many hard assets appreciate next year.
Oil, precious and industrial metals- you name it. Odds are investors will seek out commodities to protect their portfolios from the effects of a quickly dropping dollar.
However, the risk to the bullish commodity outlook is the growing possibility that the US economy falls into recession next year.
What’s more, if Congress can’t alleviate Fiscal Cliff worries by year-end, the dollar may do the opposite of what bearish dollar investors are expecting and jump higher.
No doubt about it, these are interesting times we live in…
Bernanke’s recent decision to tie interest rates to unemployment levels is an all out effort to drive businesses into hiring. What’s more, with interest rates in the gutter, investors will be forced out of cash and into the markets.
At least that’s Bernanke’s plan. Whether it works or not remains to be seen…
Until Next Time,
Justin Bennett
Category: Commodities
