The behavior of federal funds futures prices over the monetary policy cycle
AbstractThe federal funds futures market enables market participants to both hedge interest rate risk and speculate on interest rate movements. Prices of federal funds futures also reveal market participants' expectations about changes in Federal Open Market Committee (FOMC) policy. This information allows monetary policymakers to assess the degree to which asset prices already reflect potential policy moves and these prices' likely reaction to policy changes that deviate from market expectations. ; This article examines the relationship between U.S. monetary policy changes and futures market participants' ability to forecast these changes. Previous research has shown the federal funds futures market to be a relatively good forecaster of changes in the fed funds rate on average. But these studies treated futures market data as a single sample and failed to take into account the significant changes in forecast error behavior over different periods of the monetary policy cycle. ; The authors find that futures market forecast error mean and variance differ substantially over various stages of the monetary policy cycle, with overall performance improving considerably in the latter half of the 1990s before deteriorating sharply through 2000 and 2001. The data also reveal both substantial overshooting and undershooting by futures prices around turning points in the path of the funds rate. Finally, the evidence suggests that increased disclosures of information by the FOMC during the past decade have played only a minor role in improving futures market participants' forecasting performance.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoArticle provided by Federal Reserve Bank of Atlanta in its journal Economic Review.
Volume (Year): (2002)
Issue (Month): Q2 ()
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Joel T. Krueger & Kenneth N. Kuttner, 1995. "The Fed funds futures rate as a predictor of Federal Reserve policy," Working Paper Series, Macroeconomic Issues 95-4, Federal Reserve Bank of Chicago.
- Kenneth N. Kuttner, 2000.
"Monetary policy surprises and interest rates: evidence from the Fed funds futures markets,"
99, Federal Reserve Bank of New York.
- Kuttner, Kenneth N., 2001. "Monetary policy surprises and interest rates: Evidence from the Fed funds futures market," Journal of Monetary Economics, Elsevier, vol. 47(3), pages 523-544, June.
- William Poole & Robert H & Rasche & Daniel L. Thornton, 2002. "Market anticipations of monetary policy actions," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 65-94.
- Rigobon, Roberto & Sack, Brian, 2004.
"The impact of monetary policy on asset prices,"
Journal of Monetary Economics,
Elsevier, vol. 51(8), pages 1553-1575, November.
- Roberto Rigobon & Brian P. Sack, 2002. "The Impact of Monetary Policy on Asset Prices," NBER Working Papers 8794, National Bureau of Economic Research, Inc.
- Roberto Rigobon & Brian Sack, 2002. "The impact of monetary policy on asset prices," Finance and Economics Discussion Series 2002-4, Board of Governors of the Federal Reserve System (U.S.).
- Daniel L. Thornton, 1996. "Does the Fed's new policy of immediate disclosure affect the market?," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 77-88.
- John B. Carlson & Jean M. McIntire & James B. Thomson, 1995. "Federal funds futures as an indicator of future monetary policy: a primer," Economic Review, Federal Reserve Bank of Cleveland, issue Q I, pages 20-30.
- Griffiths, Mark D. & Winters, Drew B., 1995. "Day-of-the-week effects in federal funds rates: Further empirical findings," Journal of Banking & Finance, Elsevier, vol. 19(7), pages 1265-1284, October.
- Antulio N. Bomfim & Vincent R. Reinhart, 2000. "Making news: financial market effects of Federal Reserve disclosure practices," Finance and Economics Discussion Series 2000-14, Board of Governors of the Federal Reserve System (U.S.).
- Söderström, Ulf, 1999.
"Predicting monetary policy using federal funds futures prices,"
Working Paper Series in Economics and Finance
307, Stockholm School of Economics.
- Söderström, Ulf, 1999. "Predicting monetary policy using federal funds future prices," Working Paper Series 85, Sveriges Riksbank (Central Bank of Sweden).
- William Poole & Robert H. Rasche, 2000.
"Perfecting the market's knowledge of monetary policy,"
2000-010, Federal Reserve Bank of St. Louis.
- William Poole & Robert Rasche, 2000. "Perfecting the Market's Knowledge of Monetary Policy," Journal of Financial Services Research, Springer, vol. 18(2), pages 255-298, December.
- Joe Lange & Brian Sack & William Whitesell, 2001. "Anticipations of monetary policy in financial markets," Finance and Economics Discussion Series 2001-24, Board of Governors of the Federal Reserve System (U.S.).
- John C. Robertson & Daniel L. Thornton, 1997. "Using federal funds futures rates to predict Federal Reserve actions," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 45-53.
- Kenneth B. Petersen & Vladimir Pozdnyakov, 2008. "Predicting the Fed," Working papers 2008-07, University of Connecticut, Department of Economics.
- J. Benson Durham, 2003. "Estimates of the term premium on near-dated federal funds futures contracts," Finance and Economics Discussion Series 2003-19, Board of Governors of the Federal Reserve System (U.S.).
- Adrienne Kearney & Raymond Lombra, 2003. "Fed funds futures and the news," Atlantic Economic Journal, International Atlantic Economic Society, vol. 31(4), pages 330-337, December.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector).
If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.
If references are entirely missing, you can add them using this form.
If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.
If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.
Please note that corrections may take a couple of weeks to filter through the various RePEc services.