Here's how Federal Reserve interest rate hikes can put downward pressure on commodity prices: * **Stronger Dollar:** When the Fed raises interest rates, it makes holding US dollars more attractive to investors. This increases demand for dollars, causing its exchange rate to strengthen relative to other currencies. Since many commodities are traded in US dollars, a stronger dollar makes them comparatively more expensive for buyers using other currencies, potentially leading to lower demand and prices. * **Higher Borrowing Costs:** Interest rate hikes make borrowing money more expensive for businesses and consumers. This can dampen overall economic activity and reduce demand for commodities used in production and consumption. For example, lower industrial output due to higher borrowing costs could lead to decreased demand for metals and oil. * **Investment Shift:** With higher interest rates, investors might find bonds and other fixed-income investments more appealing compared to commodities. This shift in investment focus can lead to decreased demand for commodities, potentially lowering their prices. It's important to note that the effect of interest rate hikes on commodity prices can vary depending on the specific commodity and other market factors. Some commodities, like precious metals such as gold, might see a more complex response where they act as a hedge against inflation, potentially rising in price initially.
It was a pleasure to join #CNBC’s Worldwide Exchange, hosted by Frank Holland to discuss this week’s FOMC monetary policy meeting. The Committee is almost certain to leave the target range unchanged at 5.25-5.5%. The labor market is still hot to the touch and core CPI remains sticky. For the May CPI release, the headline index was flat, leaving the over-year-ago rate at 3.3%. Our US Economics team now looks for only one Fed cut this year in November. The big question is the median dot for ’24. We think the 2024 dot will show two cuts for the year, but there is a risk for only one. Having very clearly signaled a 25bp cut, the ECB delivered that move and the direction of travel is still downwards. Our European Economics team sticks with its call that the ECB will cut again in September and December. Elections are an undercurrent, and results for the European Parliament and three major EM economies – South Africa, India and Mexico – this past week brought material surprises and greater market volatility. In the European Parliament elections, the right and far-right have made significant gains, largely at the expense of the greens and centrists. The upcoming snap legislative elections in France also carry significant consequences. The commodity sell-off stands out, and our commodity strategists believe that the summer inventory draws should be enough to get Brent oil back into the high $80s-$90 range by September. #jpmorgan #CNBC #FOMC
