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How Does Fed Policy Affect Commodity Markets - Bank of Atlanta - Book Report/Review Example

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The paper "How Does Fed Policy Affect Commodity Markets - Bank of Atlanta" discusses that monetary policy can have a big impact on commodity markets, but the exact nature of the price movement depends on the direction of the change in monetary policy and the raw material in question…
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How Does Fed Policy Affect Commodity Markets - Bank of Atlanta
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New research from the Federal Reserve Bank of Atlanta finds that when the central banks surprised markets with tighter policy between 1990 and 2008, Gold and Platinum prices rose the most. When the Fed surprised with growth-stimulating rate cuts, prices for crude and heating oil were the biggest beneficiaries. The New research from the Federal Reserve Bank of Atlanta also notes that some of the differences in reaction may relate to the nature of commodities. For example, a surprise lowering in rates makes it easier for speculators to get into commodities contracts, while making it cheaper to hold inventories of a given commodity.

Also, the direction of the unexpected change in monetary policy signals something about the economic outlook, which has different influences for different stripes of commodities. Fed’s traditional policy tool, the overnight fed funds rate has been essentially at zero percent since 2008, and considering the time frame that makes it challenging to apply the paper's findings. The fund rate is expected to stay at rock bottom levels until 2015, if Feds forecasts prove accurate. What’s more, much of the stimulative power of current fed policy is now driven by the central bank’s $85 Billion a month program of bond buying, which targets longer-term rates.

The influence of monetary policy on commodity prices continues to be a big issue for policymakers as well as political leaders. In recent years Fed stimulus has been tied to big swings in energy and food prices. Which have had complicated impacts on their nations, as well as on American economic performance. For instance, prices for the paper's findingsickel, zinc, and oil hit an all-time high in 2006. According to Morgan Stanley here is how some of the major commodities will fair in the next few years.

Gold tends to move inversely to the USD but there are periods in which that relationship breaks down, the recent strengthening in the USD trade-weighted index has not been accompanied by a downside breakout in gold policymakers heading for disengagement. Oil prices will rise as the economy heats, More robust economic growth indicated by a stronger USD will mean stronger oil demand. That will put pressure on an already tight global oil balance. Natural gas will be pressured by supply build-up, MS is bearish on short-term natural gas prices owing to large buildups, but the market should tighten as this inventory is drawn down to coal and gas switching.

Soybean will spike on demand and rising South American costs, the crop has suffered from poor weather, so without additional acreage expect the stocks to their lowest in four years. Silver prices will remain elevated on strong investor demand, the investment flows will help offset the next three years' 2.5% compound annual growth rate in mine supply. The paper's findings may stop at the time when the financial crisis took hold, as the Fed began to change focus towards non-traditional tools short the economy, but the authors say it nevertheless remains one of the first studies to make sense of monetary policy shocks and change in specific commodities.

The response of individual commodity prices to monetary policy shocks hasn’t been thoroughly investigated before, until now. This is unfortunate considering the increasingly important role that commodity prices play in aggregate inflation and output, asset allocation, and investor sentiment.

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