Reshaping Fed Policy and Copper’s Elevated Implied Volatility

By Blu Putnam, Chief Economist
Erik Norland, Senior Economist
CME Group

Ending Fed Emergency Supports

• Fed signals earlier-than-expected exit from zero rates, tapering of asset purchases.
• A return to pre-pandemic norms might mean ending emergency supports.
• Biden administration appointments to Fed could help reshape monetary policy.
• Second-half 2021, 2022 economic data could be crucial to data-dependent Fed.

Elevated Implied Volatility in Copper

• Implied volatility fell from a 40-50% high in 2008 to 12% by 2019.
• Copper implied volatility surged to 30-35% early in the pandemic.
• Implied volatility did not retreat even as prices hit record highs in 2020.
• Implied volatility hovering around 22.5% indicates market uncertainty.