In its latest policy meeting, the US Federal Reserve raised its interest rates by 75 basis points (bps) for a second straight month. The cumulative increase of 150 bps in the June-July period, the steepest rise since the early 1980s, lifted the US target range of federal fund rates to 1.25 percent to 2.5 percent.
The US economy is facing its highest rate of inflation in 40 years. In June, consumer prices soared 9.1 percent, their biggest annual increase since 1981. This was thanks to surging prices for energy, food, and rent.
Like the US Federal Reserve, central banks across the world are engaged in the battle against surging inflation. Recently, the European Central Bank (ECB) surprisingly hiked its rate by a half-point. It was its first rate-hike in more than a decade. Earlier, the Reserve Bank of India (RBI) increased its repo rate to 4.9 percent, and the Bank of Canada hiked rates by a full percentage point.
The aggressive measures taken by central banks to tackle the surging inflation caused huge swings in the commodities and currency markets.
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The dollar Index, which measures the value of the US greenback relative to a basket of foreign currencies, has surged more than 11 percent so far this year. The safe-haven demand and an increase in interest rates strengthened the US currency to a near 20-year high.
Meanwhile, many of the other major currencies have showed weakness. The Euro has weakened 11.2 percent so far this year, while the GBP has depreciated by 9.6 percent. In Asia, the Japanese Yen was one of the worst performers depreciating 16 percent. Since January, the China yuan and the Indian Rupee have fallen by more than 6 percent.
Recession fears in key economies have caused selling pressure on commodities. Earlier, when Russia invaded Ukraine, commodity prices surged to new highs on inflation worries. Energy commodities, base metals, edible oils, and a few other agriculture commodities jumped to multi-year highs in mid-March.
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Gold prices rallied to near all-time high in March due to political and economic uncertainties. But it was short-lived. Tracking the performance of gold, silver too gained initially, but fell sharply later due to feeble investment demand.
Russia is one of the largest producers and exporters of crude oil and natural gas to the world market. During the first week of March, supply worries lifted crude oil prices above $130 a barrel, its highest level in the last 14 years. However, prices have now corrected more than 25 percent due to demand worries amid recession tension. Likewise, natural gas prices too, corrected by more than 17 percent from recent highs.
From their March record highs, copper and aluminium prices on the London Metal Exchange (LME) have fallen more than 28 percent and 40 percent, respectively. Steel prices also posted a decline of 15-25 percent on various futures platforms. Similarly, prices of edible oil and other agriculture commodities have cooled down dramatically in the second quarter of 2022.
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The aggressive rate hikes may give a sharp blow to the economy. The increased rates have already impacted the US economy, particularly in the housing market. Mounting unemployment and significantly slow price gains are raising concerns over a looming recession in key economies.
Looking ahead, commodity prices will remain volatile with mild negative bias in the immediate run. Demand concerns due to recession fears may induce a decline in retail inflation. Anyhow, investors will keenly track the US inflation and employment numbers to get a hint on the US Federal Reserve’s next move on policy change.
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