The Market Impact of FOMC Meetings Part 4

[WITH CODE] Analyzing the impact of FOMC meetings on returns and volatility across asset classes

Hello!

This post is the last post in the “Market Impact of FOMC Meetings” series. In prior posts, we explored the relationship between FOMC meetings and the returns in U.S. equities, rates, and FX. We also investigated how these meetings impact volatility expectations across these asset classes.

In this post, we’ll turn our attention to commodities, exploring how these markets respond to FOMC decisions, in terms of price returns and shifts in volatility expectations.

Let’s get into it.

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Introduction

In our past three posts, we noticed some interesting results. Asset classes that have a strong connection to monetary policy decisions (like rates and FX) seemed to exhibit the most significant and persistent patterns.

Even though commodities are more disconnected from direct monetary policy channels, they aren’t immune to the Fed’s influence. Gold and silver, in particular, react strongly to real interest rates. While gold is often seen as an inflation hedge, it really performs best when real rates are low or negative, which typically happens when inflation is high and the Fed is slow to raise rates.

If the Fed stays dovish in the face of rising prices, gold tends to rally. But when the Fed turns hawkish and pushes rates higher than inflation, real yields rise and gold usually struggles. Silver follows the same pattern but with added volatility from its industrial use.

Crude oil, on the other hand, responds more to economic growth expectations and the U.S. dollar. A stronger dollar from hawkish Fed policy tends to weigh on oil prices, while fears of slowing growth from rate hikes can dampen demand. But if the Fed signals it will support growth or tolerate inflation, oil often benefits from those pro-growth signals.

Now, we can determine if these relationships hold up to statistical tests. Specifically, is there a relationship between the returns and/or volatility of commodities around FOMC meetings, and how strong is this relationship?

The methodology in this analysis is consistent with the prior posts in this series. Each trading day is categorized as one of four types:

• FOMC Meeting Day (decision day)

• Pre-FOMC (one trading day before the meeting)

• Post-FOMC (one trading day after the meeting)

• Non-FOMC (all other trading days)

The analysis below includes ETFs and volatility indices for a variety of commodities.