Fed rate cuts to help bolster commodity demand: Wells Fargo

Investing.com — Wells Fargo analysts are optimistic that the Federal Reserve’s recent rate cuts will provide a much-needed boost to commodity markets, anticipating that this policy shift will drive global demand in the coming months. 

Historically, commodities have performed well following the first Fed interest rate cut, particularly in non-recessionary periods. 

In line with this historical trend, Wells Fargo expects that lower borrowing costs resulting from these rate reductions will stimulate demand, contributing to the ongoing commodity bull market.

The Fed’s decision to reduce interest rates by 50 basis points in September marked a pivotal moment, as it was the first cut since the pandemic shock of 2020. The immediate response from commodity markets has been promising. 

Gold prices surged to all-time highs of over $2,600 per troy ounce, while the broader Bloomberg Commodity Index rose by 3.4% within a week of the Fed’s announcement​. 

Analysts at Wells Fargo believe that these price movements signal the beginning of a longer-term trend, bolstered by a combination of global liquidity increases and improved borrowing conditions.

Wells Fargo’s analysts emphasize that the absence of a U.S. recession further strengthens the case for a commodity demand surge. 

Historically, when rate cuts have occurred in a non-recessionary environment, commodity prices have consistently risen over the subsequent 12-18 months.

Analysts predict that the current cycle will follow this pattern, with the added benefit of the Fed’s aggressive rate-cutting approach providing a supportive monetary environment. 

Additionally, they argue that the combination of lower rates and the Fed’s moderate approach will prevent a sharp economic downturn, further fueling demand across key commodities like metals, energy, and agriculture.

Wells Fargo expects this favorable backdrop for commodities to solidify, with a continued focus on global economic recovery. The easing cycle initiated by the Fed is likely to create a new liquidity wave, spurring investment and consumption across emerging and developed markets alike. 

Analysts maintain a positive outlook on the Bloomberg Commodity Index, targeting a range of 250 to 270 by 2025​.