In the midst of chaos there is always volatility, and the commodities sector is very much feeling the pain. This has led to growing speculation that central banks will step in if unprecedented price swings show signs of systemic impact. I do not know any central banker who wants to bail out commodities, but if market stress turns systemic, they will act. Indeed, even if the stress seems manageable, they may intervene if they believe public welfare is at risk when core commodities go from pricey to prohibitive.
In the US, the Federal Reserve will resist calls to backstop commodities groups or traders for as long as it can by citing what it believes to be its limited mandate on prices and employment — even as it argues that its anti-inflation policies will stabilise markets. But whatever it is able to do about inflation will take time, and whatever it does will also exacerbate commodity market stress.
Although commodity markets are now largely back within the guardrails following the shock of the pandemic, Russia’s invasion of Ukraine sharply increases the odds for policy interventions that drive market risk to unprecedented heights. Three sources of structural financial market risk are particularly worrying. Even if none of them stokes central bank intervention, each will surely spark a new round of systemic regulation. The lessons of this crisis build on those that were hard learnt during Covid-19 and the 2008-09 financial crisis.