Commodity Boom Forecast from Fed Policy

Chidem Kurdas

Commodity market turbulence has led to proclamations that the bubble has burst. Commodity bulls respond that recent declines are a temporary pause. Many of the arguments are about the supply and demand of specific commodities, in particular oil, silver and gold.

But the outlook for the sector as a whole depends on economic growth—-and hence Federal Reserve policy, whether for good or for ill. Barclays Capital economist and managing director Dean Maki argues that the commodity boom, driven by policy, will continue because of the way the Fed looks at inflation and unemployment.

His reasoning: Low interest rates  are one of the main drivers of global demand and the Fed, focusing on core inflation rather than food and energy prices, will keep rates low in order to bring down unemployment.

But the aging population means that there is now greater long-term – or structural – unemployment. Therefore if the Fed insists on reducing unemployment to 5%, probably the only way to get that is to create asset bubbles, he said, speaking at a conference.

Quantitative easing by the Fed has driven people to higher risk assets, in particular stocks, which  increase household wealth and hence can boost demand. Mr. Maki regards equities as the likely asset class where a new bubble is likely to form.  Meanwhile, it is unclear why the commodity boom should stop, he says.

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