Reply #22: On Wall St: Commodity boom backfires on consumers

[UpInArms]

http://news.yahoo.com/s/ft/20080229/bs_ft/fto030320080407351274

The Federal Reserve is attempting to fill up the liquidity punchbowl with big interest rate cuts. But it is beginning to look like an old party trick. Cheap cash for consumers and Wall Street banks has not translated into lower mortgage rates, let alone alleviated stress in the credit market.

Instead the prime beneficiary has been commodities. The dollar has fallen out of favour and set record lows against the euro and a basket of rivals, helping to boost commodities prices across the board.

Since the Fed started to cut rates last September, the Reuters/Jefferies commodity price index has risen more than 30 per cent, with oil, precious metals and wheat all setting record prices this week.

As a result the beleaguered US consumer faces a creeping tax in the form of higher petrol and food prices, on top of negative wealth effects from housing and the stock market's slide since October. If this trend continues, consumers may get little relief from rebate cheques due in the summer as part of the government's fiscal stimulus plan.

The real sting, however, from higher commodity prices and a weaker dollar comes in the form of higher inflation expectations. In the past month the yield on long-dated Treasury bond yields has risen sharply and the deteriorating mortgage market has pushed home loan rates back to where they were last September.

In other words, the 2.25 percentage point cut in the Fed funds rate in this period has not sparked the kind of mortgage refinancing boom that slashed home loan costs for consumers earlier this decade.

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