How the Federal Reserve’s Decision Impacts Metal Prices

by , Raul de Frutos on JUNE 16, 2016

At Wednesday’s meeting, the Federal Reserve left interest rates unchanged and officials lowered the outlook for rate increases in the coming years.

This outcome suggests that slow economic growth and low inflation are forcing the central bank to rethink how fast it can move rates higher. But let’s get to the point: how will this decision impact metal prices? The key here is that interest rates impact the value of the U.S. dollar which has a huge impact on metal prices.

Higher rates mean higher borrowing costs, which usually make a currency more attractive to investors seeking higher yields than in other currencies. So, basically, higher rates domestically (or expectations of a rate increase) normally translate into a stronger dollar which leads to lower metal prices. This happened in May, when the U.S. dollar strengthened amid new expectations that the Fed would raise rates in June or July. Consequently, base metals fell.

The Industrial Metals ETF pulls back in May and recovers in June. Source: @StockCharts.com

However, in June, the dollar pulled back, as expectations for rate increases receded. A dismal May employment report, combined with concerns about the June 23 British referendum on whether to leave the European Union, made officials pause while they weighed when to raise rates. Now, although the Fed still sees two rate increases later this year, a greater number of officials see now one increase, rather than two.

The Fed’s Economic Pencil Sketch

These projections aren’t set in stone, but they do indicate how officials’ views are changing.The Fed doesn’t see rates going as high as it thought they would before and, if this trend continues, the dollar could continue to weaken which would support metal prices.

The ongoing slowdown in China’s economy; the so-called Brexit vote set for June 23 and the next European Central Bank meeting in Frankfurt will be factors to watch for clues on whether the Fed will increase rates in the near futures. So far, unless something turns around, we continue to see metal prices supported by a weak dollar.

Source: MetalMiner