The Impact of Monetary Policy Surprises on Energy Prices

Abstract

This paper examines the effect of monetary policy surprises on energy prices at intra-day, daily, and monthly frequencies. We measure monetary policy shocks using changes in interest rate futures prices that capture unexpected changes in the federal funds target rate. We find a significant response of energy prices to surprise changes in the federal funds target rate in an intra-day window, immediately following the monetary announcement. However, the accumulated responses of energy prices to monetary shocks over a period of several days after the announcement are statistically insignificant. We also use federal funds futures data to identify the contemporaneous impact of monetary policy shocks on oil prices in a monthly structural VAR setup. We find no statistically significant effect of federal funds rate shocks on oil prices. The VAR estimates support the assumption of no contemporaneous feedback from monetary policy to energy prices.

Keywords: monetary policy, energy prices, macroeconomic news

JEL Classification: C22, E44, E52, G14, G18, Q43