Interest Rates

Historically, interest rates and the money supply have been matters of contention between agriculture and sectors like banking and manufacturing.  More specifically, there is a longstanding opposition by farm groups of tight money policies like the gold standard, re: William Jennings Bryan’s critique.  The reason is because when the supply of money is tight, it tends to cause higher interest rates and lower commodity prices, all other things being equal.

The reverse of this is also true, i.e., a rise in U.S. interest rates tends to increase the relative value of the dollar, which in turn could pressure the prices of dollar denominated commodities like cotton and oil.  In terms of physical cotton, sharply rising interests rates would make it more expensive for farmers and merchandisers to borrow money, which implies a cost-push influence to cotton prices.

Beyond currency-interest rate interactions, there are at least two exogenous (i.e., non-currency) causes for interest rates to rise. First would be when the Federal Reserve resumes raising short term interest rates.  The second mechanism for rising interest rates is exemplified by the downgrade in U.S. bonds by Standard and Poor’s in August of 2011. Just as if you or I were to suddenly get a bad credit score, there would be a more sudden, market-driven effect on the cost of borrowing — it would go up, in the form of higher interest paid by the U.S. government. Effectively, this could come about via the higher return demanded by purchases of U.S. treasury bonds. It hasn’t really happened in the U.S. yet since the August 5, 2011 downgrade, but it remains a possibility.

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