Impact Of The Fed’s Money Printing Leads To Rise In Commodity Prices

Last week the Federal Reserve announced its proposal for infinite quantitative easing (QE) in order to stimulate the US labour market. The prospect of further money printing by the US has led to a surge in commodity prices. Gold has risen to a high of $1,771 and looks set to continue as Japan have also announced that they will undertake another round of QE in order to stimulate their flagging economy. 

Virtually every major central bank has already embarked on a programme of QE over the past 12 months and this has led to the dramatic rise in the price of Gold which is often used as a hedge against inflation. Earlier in the month, Mario Draghi announced that the ECB will “do whatever it takes to save the Euro”. This raises the prospect of significant QE within the Eurozone as the ECB will be required to print large sums of money if they are to succeed in bailing out the failed banks in Greece and Spain. 

The Fed’s aggressive policy of QE suggests raises the real prospect of inflation in the US economy. The rise in commodity prices will affect consumers as rising fuel prices will place further pressure on their disposable income. The price of oil however has fallen over the past week due to a rise in exports from Saudi Arabia, the world’s largest oil producer. This will help to alleviate some of the pressure on the flagging global economy. 

It is unclear whether the Fed’s policy of QE will generate the desired stimulus to the economy. The QE programmes in Europe have had little success to date. The US will need to address the “fiscal cliff” anticipated in 2013. This is likely to require significant budget cuts and increased taxation to address the issue. The healthcare and defence sectors are likely to suffer from reductions in government spending. This could send the US economy back into recession. UK exporters and contractors in these sectors would be advised to monitor this closely and reduce their exposure to the US market.