Business | Markets

Commodity rally imminent if Fed keeps rate steady

Oil and other commodities may find more fuel to rally if troubles with US government sponsored entities (GSE) mortgage giants Fannie Mae and Freddie Mac keep the US Federal Reserve from hiking interest rates.

  • Reuters
  • Published: 00:08 July 14, 2008
  • Gulf News

New York/London: Oil and other commodities may find more fuel to rally if troubles with US government sponsored entities (GSE) mortgage giants Fannie Mae and Freddie Mac keep the US Federal Reserve from hiking interest rates.

Investors have flocked into crude, gold and other raw materials to hedge against the slumping dollar after a series of interest rate cuts by the Fed drove up prices at the pump and the grocers.

As late as last month, some investors were betting on the Fed to reverse course and raise rates soon to tame inflation and shake out some of the hot money in commodities.

But with Fannie and Freddie - the two top US mortgage finance companies - facing growing funding problems, experts say the Fed may not be able to act in the short-term.

Mounting anxiety

"Mounting anxiety about the health of Fannie and Fred now effectively guarantees the Fed will remain on the sidelines for the next few months - whatever happens to inflation," said John Kemp, commodities analyst at RBS Sempra in London.

"Dollar weakness and a continuation of the cheap money era is also a green light for commodity prices to return to recent highs and [for oil prices to] explore new territory over $145 in an extension of the global inflation play."

Oil surged to new highs over $147 a barrel on Friday, extending a rally that has tacked 50 per cent onto prices this year.

Gold on Friday touched a four-month high of over $960 an ounce. Corn, soybean and wheat futures also rose.

"You're seeing a multiplier effect of geopolitical frights, along with Fannie and Freddie. It shows fear is certainly taking hold of this marketplace," said analyst Matt McCormick.

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