So That's Why Food and Fuel Prices Are Increasing

The president of the Dallas Federal Reserve Bank, Richard Fisher, appeared on CNBC's Squawk Box this morning. In his appearance, he admitted that QE2 may have been partly to blame for the recent increase in the price of commodities.Fischer opposed QE2, and said he would oppose QE3. He stated that he believed that the Fed had done all that was necessary, and that the economy needed time to heal itself. He expressed an optimism that the U.S. economy would grow in the second half of 2011.Rounds of quantitative easing, known as QE, may have a bullish effect on commodity prices. QE is intended to increase the liquidity in the economy. If that liquidity finds its way to commodity traders, the price of commodities may rise. Simultaneously, speculators—even those who do not have access to the liquidity—may anticipate this rise and move into the commodity markets in anticipation of the bull-run.Fischer's hawkish stance echoes the sentiments of Philadelphia's Federal Reserve Bank President Charles Plosser, who stated on Monday that the Federal Reserve may tighten this year despite economic conditions.Both Plosser and Fischer are voting members of the Federal Open Market Committee this year, so their beliefs may influence Fed policy. However, they are mere rotating members.The Fed's Chariman, Ben Bernanke, is scheduled to speak on Tuesday. It will be interesting to see if he expresses a position in line with Fischer and Plosser, or takes a more dovish stance.Action ItemsBulls: Traders who believe that the Fed will not engage in further QE and may even tighten monetary policy, might want to consider the following trades:

• ProShares Short Dow30 (NYSE: DOG): A short play on the Dow Jones. The Dow may decline if the economy contracts on Fed tightening.
• PowerShares DB US Dollar Bullish Index (NYSE: UUP): A long play on the U.S. dollar. The dollar may appreciate if the Fed reduces the supply of dollars in the economy.

Bears: Traders who believe that the Fed will crack under the economic pressure and engage in further rounds of QE may consider taking positions in the following:

• SPDR Gold Trust (NYSE: GLD): A long play on gold. Gold prices may rise as investors flee dollars for a safe haven, store of value.
• PowerShares DB US Dollar Bullish Index (NYSE: UUP): A short play on the U.S. dollar. The dollar may depreciate if the Fed continues to increase liquidity in the economy.
• United States Oil Fund (NYSE: USO): A long play on the price of oil. Oil prices may rise if the dollar depreciates, as oil is traded in dollars on the world market.
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