The Fed, Corn and Soy
Welcome to the first week of trading. So far, I’ve bought soy, shorted corn, and then on a whim bought wheat. Last night when I checked, I had earned $33- however this morning, to my dismay, I saw that my portfolio had lost over $700. Trying to avoid a tiny heart attack (mostly by reminding myself that this is fake money), I went to find answers.
The big event this week was the US Federal Reserve’s press conference at 2pm EST on Wednesday. Nearly everyone thought that the Fed would finally begin the process of tapering interest rates back up, after being held at nearly zero for years in an effort to stimulate economic growth. So when Ben Bernanke announced that they would NOT be raising interest rates, the markets when nuts.
Wednesday’s surprising headline
The S&P500 gained nearly 20 points in just minutes after the announcement was made.
The impact of the Fed’s announcement on the S&P500
Despite corn’s downward trend following last week’s crop report (a bumper crop pushed prices down), the dramatic upswing of the market took corn futures with it. This is probably where my $700 went.
The impact of the Fed’s Announcement on Corn Futures
So why did the Fed do what it did? I would point to two non-economic issues driving the decision.
1. The American Congress. Congress is supposed to create and manage fiscal policy to ensure that the economy stays stable-ideally, with an upward trend. Fiscal policy is intended to check-and-balance monetary policy, which is of course directed by the Federal Reserve. Because Congress has been unable to fulfill any of their responsibilities since 2008 (probably longer, but definitely since 2008) due to partisan bickering and obstructionist politics, the US has been relying almost entirely on the Federal Reserve to maintain the small amount of economic growth we are seeing. Because of this responsibility, a responsibility that the Fed really isn’t intended to have, Bernanke has been very conservative in making any large changes to monetary policy that could shake the little confidence that the American economy has right now. Without robust fiscal policy to compliment them, the Fed is doing everything it can to maintain stability and trust in the American dollar and economy, namely by keeping interest rates low and by pushing money into the economy- aka quantitative easing.
2. Bye-bye Bernanke. After almost 8 years as the Head of the Fed, Bernanke will be stepping aside this year. Because of the already unstable economic recovery, paired with the additional responsibilities the Fed has had to assume because of the partisan congress, I think the Fed is aware that any change in leadership is going to inevitably shake the morale of the American people, and the world. Up until this week, most people assumed that the next Head of the Fed would be Larry Summers. But Summers pulled his name from the short list, leaving many wondering who would be the next at the helm. The next obvious front runner after Summers is Janet Yellen. Currently the Fed Vice-Chair, Yellen has a strong background in economic and monetary policy. She would also be the first chairwoman of the Fed, a fact which has some neanderthal political commentators concerned- will she be strong enough, authoritative enough to run the Fed etc. So in the face of this leadership transition, it seems appropriate that the Fed would choose to remain at current interest rates and not introduce any new policy changes.
So for these reasons, plus probably many more, I’m out $700. At least for now. We’ll see what happens next week!
Resources I’m finding useful in my research:
Marketplace: A daily podcast by American Public Media which discusses news from Wall Street and the greater economy in a fun and interesting way. Solid analysis that’s easy to listen to. Also post their stories online.
New York Times Business: Hourly charts of stocks, bonds, and commodities which are easy to read and compare. General data on soy and wheat with more detailed info on corn.
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