The impact of forward guidance and large-scale asset purchase programs on commodity markets

Abstract

This paper investigates how different commodity prices are affected by unconventional monetary policies (UMP) implemented by the Federal Reserve of the United States as a response to the Global Financial Crisis. We analyze impulse responses using local projections and identify UMP shocks through high-frequency identification strategy. We show that forward guidance (FG) and large-scale asset purchase (LSAP) shocks lead to distinct responses when analyzing commodity prices. We find that asset-like commodities, such as gold and silver, respond to these UMP shocks most aggressively. While an easing FG shock leads to increases in their prices, an easing LSAP shock has the opposite effect. This differential response suggests that these asset-like commodities are being used as inflation and exchange rate hedges. In contrast, production-like and agricultural commodities respond to UMP shocks in the same way as conventional monetary policy shocks. Consistent with previous literature, we find that easing LSAP shocks, to some extent, signal a negative economic outlook. Policymakers can exploit the responses from the various commodity classes examined in this paper when evaluating the effectiveness of monetary policy in different sectors of the economy.