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Monetary policy and commodity futures

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Author Info

  • Michelle T. Armesto
  • William T. Gavin

Abstract

This paper constructs daily measures of the real interest rate and expected inflation using commodity futures prices and the term structure of Treasury yields. We find that commodity futures markets respond to surprise increases in the federal funds rate target by raising the inflation rate expected over the next 3 to 9 months. There is no evidence that the real interest rate responds to surprises in the federal funds target. The data from the commodity futures markets are highly volatile; we show that one can substantially reduce the noise using limited information estimators such as the median change. Nevertheless, the basket of commodities actually traded daily is quite narrow and we do not know whether our observable rates are closely connected to the unobservable inflation and real rates that affect economywide consumption and investment decisions.

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File URL: http://research.stlouisfed.org/publications/review/05/05/ArmestoGavin.pdf
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Bibliographic Info

Article provided by Federal Reserve Bank of St. Louis in its journal Review.

Volume (Year): (2005)
Issue (Month): May ()
Pages: 395-405

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Handle: RePEc:fip:fedlrv:y:2005:i:may:p:395-405:n:v.87no.3

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Related research

Keywords: Monetary policy ; Commercial products;

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  1. Clark, Todd E. & Kozicki, Sharon, 2005. "Estimating equilibrium real interest rates in real time," The North American Journal of Economics and Finance, Elsevier, vol. 16(3), pages 395-413, December.
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