Thursday, July 14, 2011

Why Mr. Bernanke Doesn’t Seem to Be Concerned about Rising Commodity Prices


Why Mr. Bernanke Doesn’t Seem to Be Concerned about Rising Commodity Prices

When asked whether the Fed policies are responsible for rising commodity prices, Chairman Bernanke replied that rising commodity prices have to do more with rising demand coming from fast growing emerging markets rather than from Fed policies.


But why have emerging markets been growing so fast? Because of two factors: First, easy domestic monetary policy. Second, a strong rebound in the demand for the products these countries produce by developed economies like the US, Germany and France.


But domestic monetary policy has already been reversed; and developed countries have begun to slow substantially, especially the biggest market among the three, the US—both developments expected to take their toll on emerging market growth, and on the demand for commodities. Thus, Fed officials do not have to worry about commodity prices.


In fact, the Fed faced a similar situation from early 2007 to early 2008, when commodity prices were rising again, but the FED didn’t seem t be concerned. “A week economy will bring commodity prices down,” stated Mr. Bernanke in one of his appearances in front of the Congress. By the summer of 2008, commodity prices crashed. He may be right again! Investors may not want to bet against the Fed on this.

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