In Ben Bernanke’s testimony on the Semiannual Monetary Policy Report before the Senate Banking Committee this week, the Fed Chairman signaled that the central bank would continue its stimulus policies, citing that the economic landscape still possesses several red flags. And while this may have quelled fears that the Fed would wind down or scale back its massive bond-buying program earlier-than-expected, investors still remain on edge [For more commodity news and analysis subscribe to our free newsletter].
Come March 1, an automatic round of roughly $85 billion in spending reductions will take place if Congress does not agree on the fiscal budget. The prospects of such a compromise going through are mixed. Back in January, Washington managed to cobble together a last minute deal to avoid the fiscal cliff; the resulting solution raised income tax rates for those earning over $450,000, which is expected to reduce the deficit by some $620 billion over 10 years, far less than Obama’s $4 trillion deficit reduction goal.
In hopes of producing somewhat similar results from January’s fire drill, Obama has called Congressional leaders to a meeting at the White House this Friday to discuss viable solutions to the automatic spending cuts set to start the same day. The scheduling of this meeting is essentially an acknowledgement that the sequester will not be backstopped at the start [See How To Lose Money Investing In Commodities].
And while the President emphasized that “the sequester will weaken America’s economic recovery,” he also recognizes that going painstakingly through each and every cut, weighing the consequences and subsequent impact on the American public, will take time and great effort.
The Long and Short of It …
In his testimony, Bernanke also mimicked Obama’s sentiment, urging Congress to avert the sequester and sharp contraction in the short-run, but also to set its sights on reducing debt levels in the long run. The chairman does, however, disagree with Obama’s goal to stabilize the debt-to-GDP; instead, Bernanke believes lowering the metric would give Washington greater fiscal capacity to meet unforeseen economic challenges in the future [see Is Commodity Investing Dying? Part 2].
Whether or not Congress manages to come up with a solution–which many believe would only last in the short run–investors will likely take a major initial blow if they did not take defensive measures. Commodity traders should keep a close eye on crude oil and copper positions, as these risk-linked commodities will likely be under pressure from risk averse investors. The safe havens gold and silver are also likely to make significant moves, though establishing a definitive direction of the metal for the long run may be difficult to pick out just yet.
Disclosure: No positions at time of writing.