• Ian Clark, CFA
  • David Campbell, CFA, MBA

Impact of Rate Hikes on Commodities

  • Power Reporting - Insight Capital Partners

Insight Capital Partners Blog

As the Federal Reserve raises interest rates, the cost of borrowing increases, which can have a significant impact on commodities.

First, higher interest rates tend to strengthen the U.S. dollar, which can make commodities more expensive for buyers using other currencies. This can lead to a decrease in demand for commodities, as they become less affordable for these buyers.

Second, higher interest rates can also make it more expensive for companies to extract and produce commodities, as they will have to pay more to borrow money for these activities. This can lead to a decrease in the supply of commodities, as companies scale back their operations.

Third, higher interest rates can also lead to a decrease in investment in commodities, as other assets such as bonds become more attractive to investors. This can decrease demand for commodities, as investors shift their money out of these assets.

However, not all commodities are equally affected by rising interest rates. For example, precious metals such as gold and silver are often seen as "safe haven" investments, and may actually benefit from a flight to safety as interest rates rise. Conversely, industrial metals such as copper and aluminum may be more vulnerable to a slowdown in economic activity, and may suffer as interest rates rise.

At the end of a rate hikes cycle, we can expect to see a decrease in demand and supply of certain commodities, and an increase in demand for others, as investors and producers adjust to the new economic environment. The impact on specific commodities will depend on their unique characteristics, such as whether they are seen as safe haven investments or tied to economic activity.

It's also important to note that interest rate hikes aren't the only factors that affect commodity prices, as other economic and political factors, such as growth rate, trade policies, and natural disasters can also play a role.

In conclusion, the impact of interest rate hikes on commodities can be complex and multifaceted. While rising rates can decrease demand and supply for certain commodities, they can also increase demand for others. The specific impact on a commodity will depend on the commodity's unique characteristics, as well as other economic and political factors.