Opening Statement from the September 2020 CCPM Forecaster

Opening Statement from the September 2020 CCPM Forecaster

Originally published on August 31, 2020 (pre-market release)

U.S. Economy

The absence of consistent improvements in the U.S. labor market serves as one of many indicators confirming our long-held view that recovery from the COVID-induced global recession will be long and difficult. Notably, during the period of recovery additional risks could materialize thereby adding further strain to recovery efforts.

Aside from shorter-term variables which might impact commodities pricing, it is important to keep in mind that interest rates are likely to remain very low for an extended period as a reflection of reduced output.

Changes to Monetary Policy

On August 27, Fed Chairman Powell announced a new strategy to address persistent undershooting of the Fed’s inflation target. Although the Fed’s inflation target is 2%, moving forward the Fed will allow inflation to rise higher than 2% for some undetermined time period in order to boost the overall average inflation rate to 2% over the past several years. 

Powell’s rational for the change in monetary policy is based on his claim that the persistently low average inflation rate has caused a series of economic problems. Fed also expects the move will boost employment.

However, we believe it has been persistently low interest rates (which have been the response from the Fed to combat low inflation) which have led to numerous economic problems, not low inflation. Moreover, the current high unemployment rate has nothing to do with inflation. Remember that officials shut down the economy and this caused job losses.

In reality, low inflation is good for the economy and it is good for consumers. But low inflation does not mandate low interest rates unless you are trying to raise inflation.  Thus, interest rates could...