There is more proof surfacing that the Federal Reserve’s interest rate policy is bad because the economy is too weak: the CRB index. John Murphy wrote an article last week (link above) about how the Federal Reserve is making a big mistake by not considering commodities in their inflation calculations.
Interest Rate Policy Ignores the CRB Index
As the yield curve is to the stock market, so is the CRB index to inflation. The CRB index has predicted every inflationary and deflationary cycle since the 1950s. The CRB Index includes 19 actively traded commodities which include energy, industrial and precious metals, and agricultural markets.
As the Fed hikes rates, the US dollar goes up, and the CRB index has downward pressure. The CRB index doesn’t just trade opposite the US dollar. There are periods of decoupling when the CRB trades on its own merits. Decoupling happens in a growing economy when demand for commodities rises but that’s not the kind of economy we currently have.
If we chart interest rate policy to commodities, you can see that commodities are not trading on their own merits because of a growing US economy that is increasing demand for energy, industrial metals, and agriculture. Instead, commodities are trading in response to the US dollar as rate hikes push the dollar up and hence commodities down.
Notice that back in 2004 through 2006, commodities had decoupled from the Fed’s interest rate policy because the economy was growing and thus demand for commodities were overpowering the negative headwinds coming from hikes. Today, we don’t have a 2004 through 2006 situation because the economy is too weak.
The CRB index is just more circumstantial evidence that suggests the Fed is hiking rates too quickly and will likely put us into a bear market. All traders should be watching the yield curve closely. Once it goes flat or inverted, we have about from 3 to 9 months before the bear market hits.