Commodity futures prices and economic news: An examination under alternative monetary regimes

Abstract

This paper presents empirical evidence on the reactions of commodity futures prices to the announcements of the money supply (Ml), the Federal Reserve discount and surcharge rates, the CPI, the PPI, the unemployment rate and the U.S. industrial production index. Survey data were utilized to separate the unanticipated component of an announcement from the anticipated component. The purpose of the paper is two-fold. First, to re-examine the policy anticipations and inflationary expectations hypotheses in the context of commodity futures markets during alternative monetary regimes. Second, to examine the issue of commodity market efficiency using the event study approach-a method of analysis that is capable of testing the single hypothesis of market efficiency. Prior to October 1979, when the Fed had a federal funds rate target, the reactions to both announcements were insignificant and mixed in sign. However, after October 1979, the majority of these same reaction coefficients turn negative and quite a few are statistically significant. Furthermore, over the entire 1977-1984 period, a majority of the coefficients on the money supply and inflation surprises are negative. Clearly, these results are strongly in favor of the policy anticipations hypothesis and against the inflationary expectations hypothesis.