The Fed Should Be Ready to Backstop the Commodities Market

Justified as they are, the sanctions imposed on Russia — one of the world’s largest exporters of metals and hydrocarbons — are wreaking havoc on already-strained commodities markets, with potentially dire consequences for the global economy. To avoid unnecessary damage, officials should be prepared to meet this extraordinary challenge with a no less extraordinary response: Emergency support from the U.S. Federal Reserve.

In recent weeks, uncertainty about how the war and sanctions will affect supply has led prices of everything from oil to nickel to gyrate wildly, in some cases more than doubling in a matter of days. The volatility has, in turn, prompted lenders and clearinghouses to demand more collateral to back market participants’ rapidly expanding positions, in some cases boosting cash demands tenfold. Combined with supply-chain snarls, which have increased the volume of commodities in transport, this has placed extreme stress on the finances of some of the world’s largest trading firms, such as Glencore, Trafigura and Vitol — stress that recently forced the London Metal Exchange to shut down nickel trading to avert a cascade of defaults.