jackfutu18
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Be back with The Bullion Report this week, we will together discuss and find out the answer for the question: "What Happens if Central Banks Raise Rates?" As traders in metal futures trading floor, you may want to know more about it. Let's see!
This week marks another round of speculative news that the European Central Bank may move to raise interest rates. Coming off comments from the ECB Chief Trichet, most analysts seem to take it as a given that their rate will ratchet up .25 percent at their next meeting. Does this mean that the Federal Reserve will also raise rates? If central banks start to raise interest rates, what could be the impact on precious metals?
The following chart shows some of the points in the past at which interest rate changes came from the Federal Reserve:
Past performance is not indicative of future results.
***chart courtesy Gecko Software
The first thing to dispense with is the idea that a rate hike from the ECB is a guarantee. According to governing council member Ewald Nowotny, members do not “pre-commit” to rate increases. However, other banks, like the Bank of Ireland, are nearly unwavering in their forecast that an interest rate increase will come in the next few months. The reasoning behind this speculation is two-fold. Reason number one is the obvious comments from their ECB president, and two is the ongoing price inflation seen in several sectors.
I can’t speak for Mr. Trichet, but I can address the idea of current price inflation.
Even before hot spots for political tension began erupting in the Middle East, consumers and manufacturers were seeing prices for some basic commodities gain ground. Although it may not have been reflected in a significant PPI or CPI report, there was still a marked increase in goods and an effect on the consumer. The general view is that the Federal Reserve and other central banks will raise rates to try to head off future inflation.
Before analysts run off to poke a hole in what they see as a commodity price bubble, let’s consider the other factors that could influence the ECB and the Fed in the months to come. The caveat to raising interest rates to combat inflation is that it happens to battle future inflation, and many central bank members, including our own Ben Bernanke, suggest that this rise in oil and commodities is only temporary. A general peace accord in Middle East nations or a bumper crop harvest could quickly turn the markets in their eyes. However, for most of us, the idea of these temporary causes is only part of the greater picture.
Stimulus programs at home and abroad (think Quantitative Easing Round Two) increased money supplies and depressed currency values. Before that, a credit crisis and global meltdown wreaked havoc on financial markets. These things haven’t really gone away. In fact, to some more critical eyes, the alleged rebound of the economy has been a figment based on inflation. That means that the unprecedented level of debt in the US and the high levels of unemployment are probably going to loom larger than any action the Federal Reserve might take.
What Happens if Central Banks Raise Rates?
This week marks another round of speculative news that the European Central Bank may move to raise interest rates. Coming off comments from the ECB Chief Trichet, most analysts seem to take it as a given that their rate will ratchet up .25 percent at their next meeting. Does this mean that the Federal Reserve will also raise rates? If central banks start to raise interest rates, what could be the impact on precious metals?
The following chart shows some of the points in the past at which interest rate changes came from the Federal Reserve:
Past performance is not indicative of future results.
***chart courtesy Gecko Software
The first thing to dispense with is the idea that a rate hike from the ECB is a guarantee. According to governing council member Ewald Nowotny, members do not “pre-commit” to rate increases. However, other banks, like the Bank of Ireland, are nearly unwavering in their forecast that an interest rate increase will come in the next few months. The reasoning behind this speculation is two-fold. Reason number one is the obvious comments from their ECB president, and two is the ongoing price inflation seen in several sectors.
I can’t speak for Mr. Trichet, but I can address the idea of current price inflation.
Even before hot spots for political tension began erupting in the Middle East, consumers and manufacturers were seeing prices for some basic commodities gain ground. Although it may not have been reflected in a significant PPI or CPI report, there was still a marked increase in goods and an effect on the consumer. The general view is that the Federal Reserve and other central banks will raise rates to try to head off future inflation.
Before analysts run off to poke a hole in what they see as a commodity price bubble, let’s consider the other factors that could influence the ECB and the Fed in the months to come. The caveat to raising interest rates to combat inflation is that it happens to battle future inflation, and many central bank members, including our own Ben Bernanke, suggest that this rise in oil and commodities is only temporary. A general peace accord in Middle East nations or a bumper crop harvest could quickly turn the markets in their eyes. However, for most of us, the idea of these temporary causes is only part of the greater picture.
Stimulus programs at home and abroad (think Quantitative Easing Round Two) increased money supplies and depressed currency values. Before that, a credit crisis and global meltdown wreaked havoc on financial markets. These things haven’t really gone away. In fact, to some more critical eyes, the alleged rebound of the economy has been a figment based on inflation. That means that the unprecedented level of debt in the US and the high levels of unemployment are probably going to loom larger than any action the Federal Reserve might take.
