Twelve months ago, the rate-tightening cycle for the US Federal Reserve was well underway as inflation worries weighed on markets, and the building frenzy spurred by governments shoring up economies reeling from the impacts of COVID turbocharged demand.
The world’s most influential central bank has been at the forefront of fighting inflation, with Governor Jerome Powell well aware of the painful period in US history in the early 1980s when his predecessor, Paul Volcker, oversaw rate rises that saw the official benchmark reach 21% in 1981.
Taming the inflation genie resulted in a deep recession for the US, but it was a response necessitated to combat aggressive price rises that had their earlier genesis in the oil shocks of the 1970s.
Fast forward to the second half of 2024, Powell has tamed the inflation beast for now.
While the boom thrill for many is gone following the reality of managing debt, the key for central bank governors around the world is to best assess how to support the economy.
Lowering rates and keeping people in work is crucial for politicians and policy makers alike.
The possibility of the Fed pricing in a rate cut has significant implications, particularly for the resource sector, notably oil, metals, and agricultural products.
Despite conjecture — such as cooling inflation, lower-than-expected GDP growth, and geopolitical tensions — a lower cash rate in the US would provide some positive news for investors more broadly.
Implications for the resource sector
Lower interest rates typically weaken the US dollar, and since most commodities are priced in dollars, a weaker greenback could conceivably benefit oil-producing nations especially.
However, politically volatile countries like Venezuela may need more than just a massage of the effective fed cash rate to make a difference, as the country’s reform reflux persists after tying itself to inflated oil prices more than a decade ago.
Globally, the effects of cheaper capital while positive in the short-terms highlights a global economic slowdown after a prolonged period of monetary and fiscal stimulus.
The great unwind is on, and for economies such as China, the collapse of indebted property developers is a case in point, as the country’s ghost cities become emblematic of the question of whether the great modern march has taken place too quickly.
Cheaper capital may have a material impact on capital availability but is more likely to try and instill confidence in a global economy reeling from conflicts in Eastern Europe, the Middle East, and civil unrest in Venezuela.
The consolidation question for miners, who have already spent considerable capital on development, will almost certainly become a talking point against the prevailing backdrop of a slowing global economy.
Ironically, while stock markets have enjoyed the rare air of records in recent weeks, an uptick in volatility and an uncertain political environment provide those interested in old-world economy fundamentals a chance to cautiously assess the near-term.
The Federal Reserve’s influence, to that end, cannot be overstated.
Dan Petrie is Mining.com.au’s Head of Data, a former data editor at Bloomberg LP, analyst at Macquarie Bank and contributing data expert to Google Digital News Academy
Images: Rochelle Padua and US Federal Reserve
