US: Fed interest rate hike could lift commodity prices - Mysteel

The US Federal Reserve announced on Wednesday that it is raising benchmark interest rates by three-quarters of a percentage point, the largest increase since November 1994, bringing the interest rate to a range of 1.5%-1.75%.

The Fed's sharp interest rate hike is seen as a strong countermeasure to soaring rates of inflation in the United States, now at a 40-year high, and Chinese pundits suspect the Fed's move will impact global commodity markets on multiple fronts.

Over the long term, the strategy will curb global demand for commodities, a market analyst based in Shanghai predicted.

For example, the huge subsidies allocated by the US government after the COVID-19 outbreak began rippling through communities significantly boosted the country's real estate market, thereby stimulating consumption of durable household goods, he explained. Going forward, both of these will cool as the interest rate hike will make purchasing a home more expensive.

Under this scenario, as China is a massive supplier of household items to the US market - everything from electric appliances to garments to homewares - any decline in demand will drag on China's export prices in the future, he added.

On the other hand, commodity prices are unlikely to peak in the near term, according to the analyst, since markets had been anticipating an aggressive increase in the interest rate from the Fed for some time. Moreover, bearish sentiment had already dampened some commodity prices before the Wednesday's announcement, and once news of the rate hike is fully dissected and digested by the market, prices may actually strengthen, he suggested.

Besides, monetary policy alone cannot correct the fundamental imbalance between supply and demand, he said, because the Russia-Ukraine war will continue to disrupt commodity supply chains, such as those for natural gas and nickel. Supply shortages emerging at a time of high demand will see prices of these commodities continue appreciating.

Moreover, the frequent adjustment of US interest rates will influence domestic commodity prices in China through fluctuations in currency values and exchange rates. History suggests that during the six cycles of interest rate hikes completed by the Fed since 1980, most Chinese commodity prices cruised higher, and the prices of oil and petroleum products rose particularly strongly.

"The impact on commodity markets does not manifest instantly, and the Commodity Research Bureau Index remained largely unchanged in four out of the six interest rate hikes the Fed made over the past two decades," another market watcher based in Shanghai said.

Federal Reserve Chairman Jerome Powell said the surge in the interest rate was unusual, and that he did not "expect moves of this size to be common". But he also hinted that another increase of .50 or .75 of a basis point in the interest rate may be decided in July.

Written by Anthea Shi, shihui@mysteel.com

This article has been published under an article exchange agreement between Mysteel Global and SteelMint.