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Because key commodities are traded in US dollars, the Federal Reserve has a special role to play in defending US currency from bearish speculators who use higher interest rates in an attempt at containing the “Commodity Super Cycle.” However, the Fed is also focused on supporting the US housing market, which is becoming lethargic. America's central bank does not want kill the goose that lays the golden eggs for the US consumer.

Fed governor Donald Kohn admitted on April 14th, that the Fed’s rate hike campaign is almost out of ammunition. "Overshooting is one of the things we are very aware of as a risk in policy today," noting that it was not good enough to just "look out the window" at current conditions. “The economy is at an extremely interesting juncture," Kohn said. Governor Susan Bies told reporters, "We're closer to neutral than we were a few months ago,” she said.

Federal Reserve policy-makers on March 27-28th might have signaled a peak in the federal funds rate at 5 percent. "Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy.” However, “with energy prices remaining high and the prices of other commodities continuing to rise, the risk of at least a temporary impact on core inflation remains a concern," according to the Fed.

US Libor Rate compared to the Reuters CRB Index 4 month chart:

Given the choice between battling the “Commodity Super Cycle” or lending support to US housing prices, the Fed would probably choose to prevent deflation in real estate. However, after the Fed moves to the sidelines, neither the Bank of Japan nor the European Central Bank seem determined enough to combat rising commodity prices. The BOJ and ECB prefer to keep their equity markets buoyant with cheap money policies. So, the G-7 central bankers must rely on open mouth operations to confuse commodity speculators.

Source: Fed Rate Hikes and the Commodity 'Super Cycle'