US Fed rate increases and commodity performance

In its most recent policy meeting, the US Federal Reserve raised interest rates by 75 basis points, marking the fourth consecutive large rise this year. The benchmark federal funds rate goal has now been raised to its highest level since 2008 as a result of this move.

The FOMC began boosting interest rates in the first quarter of the year after holding them at or around zero since Covid's inception. The Fed increased its benchmark interest rates for the first time since 2018 in March, increasing them from 0.25 to 0.50%.

The Federal Reserve (Fed) announced four more rate increases this year, bringing the benchmark federal funds rate to between 3.75% and 4% in November as the US central bank fought the worst bout of inflation in forty years.

But the increase in US interest rates has a bad effect elsewhere. A two-decade high was attained by the US dollar, which outperformed other world currencies. Despite the US dollar's appreciation since mid-2021, the majority of the quick growth has taken place when the Fed started hiking rates.

Investment from emerging economies withdrew as a result of the US rate increase. Investors have shifted to the US dollar because it is seen as safe and more alluring now that interest rates are higher.

Global central banks raised interest rates at the same time to control inflation, following the US Fed's lead. The possibility of a recession in 2023 and a spate of financial catastrophes in emerging nations has caused concern around the world.

The Fed's decision affected world commodities prices as well. Due to the expense of financing inventories, interest rates and commodity prices are adversely correlated. Commodity prices often decline as interest rates rise as a result of the increased cost of maintaining stockpiles.

Bullion prices are often on the lower side when the central bank starts to raise interest rates. Since March, gold prices in the important London market have fallen by more than 22%, while silver prices have fallen by nearly 19%. Interest-free commodities like bullion often suffer more negative effects from an increase in interest rates.

Concerns about demand also caused significant losses for base metals including copper, aluminum, lead, and zinc. Copper prices fell by more than 27% on the important London Metal Exchange, while aluminum prices fell by approximately 44% from their March highs. Prices for lead and zinc also followed a similar pattern. The metal complex also suffered from a strong US currency and growing worries about China's weakening demand, which is the world's largest purchaser of commodities.

Since March, crude oil prices have fallen more than 31% in the category of energy commodities. Prices were lowered by a moderate expectation for demand amid worries about recession in some nations and stable supply from major producers. Due to supply concerns from the major exporter Russia, natural gas prices also declined but were very unpredictable.

The US dollar's strength continues to have an impact on world commodities pricing. Since March, when the Fed started raising interest rates, the dollar index, which gauges the value of the US dollar in relation to other currencies, has increased by more than 15%.

Since the US dollar serves as the standard for pricing most commodities, the price of goods measured in other currencies increases when the dollar advances. As a result, there are more raw resources available, which eventually tends to cause demand to drop.

The Fed has hinted that its robust campaign to combat inflation is close to its conclusion. However, until inflation levels return to normal, rate increases in smaller increments are anticipated. The global economy and commodity demand may continue to suffer as a result of this.

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