Near-Zero Interest Rates Through 2014
Ben Bernanke and the Federal Reserve surprised markets on Wednesday morning with a renewed commitment to keep interest rates near zero until late 2014. This policy, which began in 2008, is intended to create jobs by stimulating the economy. Low interest rates can have far-reaching effects, allowing for cheaper home mortgage payments, lower credit card interest rates and lower business borrowing costs.
However, low interest rates can be a double-edged sword for investors who will now face reduced yields on investments like CDs, savings accounts or Treasury bonds. With U.S. interest rates near zero, investors may be tempted to exchange some of their U.S. Dollar holdings for those that are denominated in foreign currency.
The Australian dollar, for example, benefited from the Fed announcement. Australia offers 4.25% on its short-term debt. The interest rate can be equated to the “rent” a country will pay for the use of investor funds. Faced with receiving “rents” close to zero from the Fed, investors decided that buying higher-yielding Australian dollars was the more attractive proposition. The “Aussie” was up big this week to a three-month high, trading at $1.06 on Friday morning.
Gold Glitters on Fed Comments
Some economists warn that increased borrowing spurned on by low interest rates can lead to inflation or even asset price bubbles, like those that occurred in the housing market over the last decade. As a result of this week’s announcement, global investors flocked toward assets that could benefit from inflation, such as gold and silver, which rose sharply on the announcement. By Friday, gold had risen $70 per ounce to $1736 (+4.2%) and silver had spiked $2.10/oz to $33.77 (+6.6%).
Gas Driller Powers down Rigs due to Low Prices
Chesapeake Energy, the biggest independent U.S. natural gas producer, announced Monday that it would pull the plug on many of its drilling rigs due to skidding prices. Relatively balmy winter weather, improved drilling technology, and sluggish conversion of vehicles to run on natural gas caused prices to hit 10-year lows last week.
Despite the fact that many experts expected the reduction in production, it fueled a rally, with futures prices up more than 18% as of Thursday morning. Although prices had deflated to $2.70 per million British thermal units by Friday morning, the weekly price gain was over 13%.
Opinions are solely the writer's. Walt Breitinger is the president of Breitinger & Sons LLC, a commodity futures brokerage firm in Valparaiso, IN. He can be reached at (800) 411-3888 or www.indianafutures.com. This is not a solicitation of any order to buy or sell any market.