The Fed’s Biggest Rate Hike In 40 Years Is Coming. What Does That Mean For Commodities?

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Updated: Sep 16, 2022, 12:25 GMT+00:00

It’s becoming more evident, day by day, that Central banks across the world are fighting a losing battle against rapidly surging inflation and no matter what actions they take now, it will be nowhere enough to tame ever-rising inflationary pressures.

The Federal Reserve Is Ready For Another Massive Rate Hike

If anyone expected inflation to peak in the summer, the U.S Consumer Price Inflation report for August has definitely dashed the hopes.

Desperate times call for desperate measures and times are, arguably, increasingly desperate. The persistence of high inflation has increased odds that the Federal Reserve may have no other option, but to resort to their biggest interest rate hike in more than 40 years.

After yet another, red-hot U.S. Inflation reading – a long list of leading Wall Street economists raised their forecasts – signalling a 100 basis-point hike could now be on the cards this month.

The last time the Fed made such a drastic move was in the early 1980s — another period marked by sky-high inflation.

Fed officials have already hiked interest rates by a whopping 75 basis points at each of their last two meetings.

And so far, those efforts have hardly made a dent on Inflation.

All of this points to one conclusion: the U.S Federal Reserve and its Chairman Jerome Powell now have a very valid and justified reason for taking even bigger steps to combat the most entrenched and stubborn levels of inflation seen in decades.

Inflation and Energy Prices, What’s Next?

If you want to know where inflation is heading next, then just take a look at the bullish trend in energy prices.

This year, energy prices have been on an absolute tear. On one hand, demand is booming as economies recover from the coronavirus pandemic. On the other hand, sufficient supplies to meet this demand are being hampered by geopolitical factors.

While demand for energies has skyrocketed, investment in supply has been held back by the move to decarbonize economies. Natural gas prices have been pushed up by growing tensions between Russia and Ukraine – sending benchmarks on both sides of the Atlantic blasting through all-time record highs.

Natural Gas prices have soared to 12 times their average for this time of the year and we haven’t even entered the winter months yet. Meanwhile, disruptions to supply chains and labor shortages have exacerbated pressure on the balance between supply and demand.

As traders very well know – there is a strong correlation between energy prices and inflation. When energy prices accelerate at a red-hot pace, so does inflation – and that undeniably one of the biggest fears for policy makers.

The big question now, is will the Fed raise interest rates by another “super-sized” 75 basis point hike again this month or will they shake the markets with an even bigger and bolder “100 basis point” rate hike?

Only time will tell, however one thing we do know for certain is that extraordinary times create extraordinary opportunities and right now, the commodity markets are a traders’ paradise packed with endless opportunities to capitalize on the short-term macro-driven volatility!