What will the Fed Funds rate cut today do to precious metal prices? And other commodities? And food, oil, etc? Just curious as to what people think.
Well, if you've bought gas recently, you already know the answer. The government might not be willing to put it into simple words, but when they start bailing out banks and financial institutions, thats a sure sign the economy is in a recession, based on past such events. Guy~
Won't do much to oil prices... that's set by too many external factors for the US to be able to control significantly (believe me, we'd love to control it if we could.) The most direct result altering the federal funds rate has is on the interest rates of short term loans. They follow suit pretty quickly when the fed funds rate is raised or lowered. A bit more complicated when you talk about other prices. But when the fed fund rate is raised, loans become more expensive, thus money supply is lower; this will slow down the economy but also slow down inflation. Lowering it has the opposite effect; loans become cheaper, money supply is higher, thus the economy speeds up by inflation goes up. Managing the fed funds rate is a balancing act between keeping the economic growth at a healthy pace but also keeping inflation at a reasonable level (think of inflation like blood pressure; it has an optimal rate, and is bad for the economy if it is too low or too high.) Basically what the Federal Reserve tries to do is stabilize the economy (it's a common misconception that their job is to "help" the economy by always encouraging growth; they just want the economy to be stable.) When inflation goes up, prices go up (which is basically the defintion of inflation.) You can expect prices to go up as inflation does. Precious metals will go up partly as a result of just general inflation, and partly as a result of the increased demand for them when the overall world economy is weaker or at least more uncertain. Because there is a huge lead time to being able to produce more precious metals (have to find them, mine them, refine them, etc.) the prices take a while to react as intially the increased demand can not be quickly reacted to with increased supply. So you can expect precious metals prices to be pretty high for a while, even after the economy recovers. But eventually supply will catch up, and the prices will settle. Too early to tell if we're in a recession (which is defined as 2 or more consecutive quarters of negative GDP growth) but it can be said that it is definitely slowing down. That with high oil prices, inflation, and genral uncertainty about the economy, you can expect precious metal prices to be pretty high for quite a while. They will drop off eventually, but precisely when, who knows... best you can hope for is an educated guess.
