Will interest-rate cuts turbocharge oil prices?
As policymakers prepare to ease policy, traders (and presidential candidates) hold their breath
WHEN commodity prices move in tandem, it is usually because real-world events jolt markets. China is the world’s biggest consumer of raw materials, so its economic leaps and stumbles matter. Russia’s invasion of Ukraine hindered the trade of fuels and grains, causing prices to surge. But every once in a while it is news in the financial sphere that prompts traders to act. And the most common source of such news is America’s Federal Reserve.
On Aug 23, Jerome Powell, the central bank’s chair, said that the time had probably come to lower interest rates. A first cut is expected on Sep 18, when its rate-setting committee meets.
The shift would call an end to a cycle of rises that has taken the Fed policy rate from close to zero in 2022 to between 5.25 and 5.5 per cent today. Rate cuts lower the opportunity cost of owning commodities, which, unlike assets such as bonds and property, do not provide a yield.
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