By Steven K. Beckner
(MNI) – The upsurge in commodity prices is not a result of the
Federal Reserve’s quantitative easing, according to research at the San
Francisco Federal Reserve Bank released Monday.
San Francisco Fed economists Reuven Glick and Sylvain Leduc contend
that, if anything, the Fed’s large scale asset purchases, better known
as “QE2,” have put downward pressure on commodity prices.
“Prices of commodities including metals, energy, and food have been
rising at double-digit rates in recent months,” they write. “Some
critics argue that Federal Reserve purchases of long-term assets are
fueling this rise by maintaining an excessively expansionary monetary
stance.”
“However, daily data indicate that Federal Reserve announcements of
large-scale asset purchases tended to lower commodity prices even as
long-term interest rates and the value of the dollar declined,” Glick
and Leduc add in an article published in the San Francisco Fed’s
Economic Letter.
The authors acknowledge that commodity prices “have surged since
Chairman Bernanke’s Jackson Hole speech,” when the Fed chief signalled
the impending resumption of QE and a large further expansion of bank
reserves on the Fed’s balance sheet.
But Glick, a group vice president in the San Francisco Fed’s
Economic Research Department, and Leduc, a research advisor, say their
studies of commodity price behavior following large scale asset purchase
announcements (LSAPs) “show that commodity prices actually tended to
fall following such announcements.”
“These effects suggest that market participants may have viewed
LSAP announcements as signaling lower future economic growth in the
United States or indicating greater risk rather than implying higher
inflationary pressures,” they write.
The two economists cite rising global demand for oil and other
commodity prices as explaining the upsurge in their prices.
They concede that “this does not rule out the possibility that
expansionary monetary policy in a large country such as the United
States may also have contributed to the global rise in commodity
prices.”
“Monetary policy can affect commodity prices through several
channels,” they go on. “For instance, monetary policy influences
interest rates, and rates in turn affect demand for commodities.”
“In the case of LSAPs, Fed purchases of long-term Treasury
securities may lower long-term interest rates through the portfolio
balance channel,” they continue. “If different assets are imperfect
substitutes in investor portfolios, a decline in the relative supply of
Treasury securities available to private investors will result in higher
prices and lower yields on these assets. The resulting stimulus to
aggregate demand can boost demand for all goods, including commodities.”
“The prices of storable commodities could also rise as interest
rates fall because, by decreasing the cost of carrying inventories,
lower rates stimulate inventory demand for commodities,” they go on.
“Moreover, because most commodities are priced in U.S. dollars, the
lower value of the dollar that frequently follows an easier monetary
stance would tend to reduce the relative price of commodities for
holders of other currencies, also increasing demand.”
“Finally, to the extent that commodity prices are relatively
flexible, they may respond to economic developments more quickly than
other goods prices,” they add. “As a result, higher inflation
expectations in the wake of looser U.S. monetary policy could be quickly
reflected in the prices of commodities that are determined by
forward-looking asset market considerations.”
However, Glick and Leduc say “there are other channels through
which LSAPs might cause commodity prices to fall.”
“The LSAP announcements about monetary policy may have signaled
that the Fed perceived economic conditions to be weaker than previously
thought,” they write. “Alternatively, they may have increased market
worries about risk and made Treasury securities more desirable as
safe-haven investments.”
“Thus, an announcement that makes investors feel that conditions
are worse than originally perceived or that heightens risk concerns may
lead investors to increase their demand for Treasuries, lowering their
yields,” they say. “These concerns also could reduce investor demand for
other assets, such as commodities, resulting in lower prices.”
After studying the behavior of the industrial metals and energy
subindexes of the Goldman Sachs Commodity Index (GSCI), Glick and Leduc
conclude, “Our analysis does not provide evidence that Federal Reserve
large-scale asset purchases fueled the rise in commodity prices.”
“It shows that, despite the fall in long-term interest rates and
the depreciation of the dollar, commodity prices fell on average on days
of LSAP announcements,” they write. “The effects were more pronounced
during the first round of LSAPs. The results may have occurred because
the LSAP announcements heightened investor concerns about risk or led
them to revise downward their growth expectations.”
“Thus, other factors, such as growth in emerging market economies,
are more likely to be the main drivers behind the recent rise in
commodity prices,” they add.
** Market News International **
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