The Impact of U.S. Monetary Policy on Metal Futures Prices: An Arch Model Analysis

Abstract

The article empirically examines the impact of U.S. monetary policy on futures prices of non-ferrous metals (including copper, alum, zinc, lead, tin, nickel, and overall non-ferrous metal price index), using the data since the 1980s. The regression analysis with the arch model indicates that the rise of federal funds rates has some extent explaining power on the decrease of metal futures prices, as shown by the significant negative relationship between them. Intuitively, an increase in interest rates reduces currency liquidity and suppresses the demand for commodities such as non-ferrous metals, thus the decrease of their prices. Besides, this research also identifies a significant correlation between futures prices and M2, with a positive correlation between the means of their variables and a negative correlation between the variances of the variables. The metal spot price reasonably predicts its corresponding future prices, as those two prices are found significantly positively correlated with coefficients around 0.9-1.1.