Fed interest rate policy is not negative for metals markets

The increase in the discount rate by the U.S. Federal Reserve is not negative for metals markets. In the current environment, it has even to be seen as a positive sign. Although there are first voices to delete the phrase in the statement of the FOMC that the interest rates would remain low for an extended period of time, a shift in interest rate policy, not on the agenda. Thus, the U.S. interest rate policy remains positive for the metals markets.

The financial and commodity markets reacted in the previous week already nervous that the voices in the Fed increase, which argue to drop at least in the FOMC statement any hint about how long Fed interest rates would prevail on the extremely low levels. It is therefore understandable that the markets, especially in Asian trading, followed the increase in the U.S. discount rate by 0.25% points to 0.75% with a Pavlov reaction of falling prices.

But this move by the Fed is not a change in interest rate policy. After the bankruptcy of investment bank Lehman Brothers, the Fed has massively reduced its interest rates. The discount rate is not the main interest rate of the Fed policy. Over the "discount window", the U.S. banks get emergency liquidity from the Fed. Hence the discount rate was generally well above the Fed Fund rate. During the financial crisis, the Fed has massively reduced the spread between discount rate and the Fed Fund target rate.

In hearings, Fed Chairman Bernanke has made it always clear that the U.S. economy is recovering, but still faces significant headwinds. This assessment has been reflected in the statements of the FOMC after the meetings. To interpret the increase in the discount rate as a signal of an imminent reversal of monetary policy is therefore a mistake. Moreover, this measure reflects the contrary that the situation has sufficiently stabilized on the U.S. money market, and thus, the Fed can gradually return from an emergency to a normal situation.

This view has gained dominance in the stock markets in Europe at first. After a weak opening, equity markets stabilized and recovered further during the trading session. This has pulled the metals markets higher, too. In addition, the euro could recover against the U.S. dollar from the lows and turned into the plus. The normalization of the U.S. money market underscores the fact the Fed's optimism about the further development of the U.S. economy. The economic data released the previous week had been largely better than expected. The recovery in equity markets is likely to continue in this light. Rising stock markets are in the current environment also positive for the metals markets, which should also have more upside potential.