It’s All About Interest Rates These Days

One of the big questions in the markets right now is what’s going to happen with interest rates. Investors have been speculating for weeks that the Federal Reserve will raise interest rates, which would drive a move from precious metals and other commodities back to the recovering equities sector. As the Dow has climbed speculation has been steadily increasing about when rates will go up, but it looks like there might be a while to wait yet.

The Federal reserve has just held its annual symposium in Jackson Hole, Wyoming, with guests including bankers and politicians from around the world, and one of the main topics of discussion as the economic recovery and how to keep it on track. Among the major economies the USA and UK are the ones most confident in the strength of their equities markets, so should also be the ones thinking most seriously about raising lending rates. However it looks as if this option is on the table, but not likely to be implemented just yet; policymakers in both countries, and certainly in the Fed, don’t think the time is right yet.

One area of concern in the US economy has been the employment rate. While better than 200,000 net new jobs have been created every month this year, the bad news is that a very large percentage of these have been part-time jobs; the total number of American workers in full-time employment is actually down, possibly by as much as half a million. That has implications for the recovery’s solidity, so the government and the Fed are keen to encourage employers to take on more permanent staff. That makes raising rates too risky to proceed with right now.

New Fed chief Janet Yellen believes that the US labor force still has a lot of slack in it and that even though hiring is improving, and the end of the unprecedented run of low rates has to be planned, the job market still hasn’t fully recovered from the recession. There are dissenting voices, even within the Fed itself – St. Louis president Bullard suggested a tightening of rates might even be brought forward – but Yellen’s vote is likely to carry the day and there probably won’t be any significant raise before early next year at least, and perhaps as late as early summer.

While the way ahead for the USA is up for debate Eurozone finance ministers are looking at cutting rates even further to stave off a deflationary spiral. Given the volume of trade between the USA and EU there are risks in having policies between the two markets diverge too much, so that’s likely to act as a further drag on any rise here. Japan is also planning to hold firm until prices are stabilized, again mainly because their economy is relying too much on part-time workers right now.

It’s always hard to predict rates far in advance and new developments could nudge the Fed into action at any time, but from the point of view of commodity investors it could be time to dial back talk of an increase in the near term. We could be nine months away from that becoming a reality.