Keeping in mind, “Views expressed do not necessarily reflect official positions of the Federal Reserve System,” Daniel L. Thornton, Vice President and Economic Adviser, writes in the St. Louis Fed’s Economic Synopses, “Policymakers are aware of the possibility that a persistent policy of exceptionally low interest rates could result in a misallocation of credit and inflate asset prices.”
The dramatic increase in commodity prices since the early
2000s could be due to other factors independent of central
banks’ interest rate policies. For example, the increased demand
associated with a shift to commodities being assets in a portfolio
should increase asset prices independent of Fed policy.
But in the same long paragraph,
Nevertheless, the extent to which excessively low nominal
interest rates may affect a wide range of asset prices is an
important research and policy question. If such an environment
induces economic agents to switch from lending to
investing in commodities, the result could be a commodity
price bubble:As more investors purchase commodities, commodity
prices rise, which causes more investors to view commodities
as an attractive alternative to lending, causing commodity
prices to rise even further, and so on and so forth.
Once commodity prices rise to an unsustainable level—for
example, if industrial metal prices rise to a level that cannot
be sustained by the prices of the products they are used to
produce—or policymakers return the policy rate to or above
the equilibrium level, the bubble will burst.