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New Atlanta Fed Research Explores Links between Fed Policy, Commodity Prices

monetary policyA new Atlanta Fed working paper finds that unexpected changes in the Fed's monetary policy can influence commodity prices.

Mining futures from the past
Nikolay Gospodinov, an economist at the Atlanta Fed, and American University of Beirut Professor Ibrahim Jamali examined futures data from 1998 to 2008. They found that unexpected increases in the federal funds rate—the Fed's main policy lever—were associated with rising prices for gold and platinum. Meanwhile, surprise cuts to the policy rate increased prices for crude and heating oil.

Individual commodities may respond differently to the monetary policy shocks as a result of variations in their characteristics and potential uses. "For instance, gold is an investment commodity whereas copper has significant industrial uses," the authors noted. "The responses of these commodities are therefore expected to be, at the outset, different."

Viewing existing relationships through a new lens
A large body of research has explored the links between monetary policy changes and such variables as interest rates, exchange rates, and stock returns. But this paper is one of the first to examine how monetary policy shocks influence individual commodity prices. The topic is important, especially "given the increasingly important role that commodity prices play for aggregate inflation and output, asset allocation, and investor sentiment," the authors note.

November 25, 2013


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