Fed paper examines commodity price correlation

federal reserve

An interest rate drop can increase the correlation between commodity prices by smoothing out product-specific shocks, according to a discussion paper published by the Federal Reserve on November 27.

The authors, Joseph Gruber and Robert Vigfusson, find a lower interest rate decreases the volatility of commodity prices by reducing the cost of holding inventory. This provides incentives to smooth prices over time in response to temporary shocks, the authors say.

Product-specific shocks tend to be mo