Are large-scale asset purchases fueling the rise in commodity prices?

Abstract

Prices of commodities including metals, energy, and food have been rising at double-digit rates in recent months. Some critics argue that Federal Reserve purchases of long-term assets are fueling this rise by maintaining an excessively expansionary monetary stance. However, daily data indicate that Federal Reserve announcements of large-scale asset purchases tended to lower commodity prices even as long-term interest rates and the value of the dollar declined. The financial crisis that started in the summer of 2007 led to the worst U.S. recession since the Great Depression. Monetary policy makers responded by implementing unprecedented programs to stabilize financial markets and restore economic growth. The Federal Reserve lowered its main policy instrument, the short-term federal funds interest rate, to near zero in a little more than a year and communicated its intention to keep the rate low for an extended period. Constrained by its inability to lower the federal funds rate below zero, the Fed has also engaged in “unconventional ” monetary policy in order to maintain well-functioning markets and provide further stimulus to the economy. These initiatives have included large-scale purchases of mortgage-backed securities and debt issued by Fannie Mae, Freddie Mac, and Ginnie Mae. In addition, the Fed has bought longer-term Treasury securities to lower long-term interest rates.

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