Predicting monetary policy using federal funds future prices
AbstractIn theory, prices of current-month federal funds futures contracts should reflect market expectations of near-term movements in the Federal Reserve's target level for the federal funds rate. However, empirical results show that such measures of market expectations are too noisy to predict day-to-day changes in the funds rate target; partly due to time aggregation problems, partly because they are affected by funds rate movements not directly related to monetary policy considerations. In particular, the futures market shows a large amount of systematic variation across months and trading days, variation that needs to be taken into account when predicting policy moves or extracting policy expectations. For the period from January 1994 to February 1998, the extracted expectations perform fairly well in predicting the target level that will prevail after the next meeting of the Federal Open Market Committee, especially when adjusting for market regularities.
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Bibliographic InfoPaper provided by Sveriges Riksbank (Central Bank of Sweden) in its series Working Paper Series with number 85.
Length: 32 pages
Date of creation: 01 May 1999
Date of revision:
Publication status: Published in Journal of Futures Markets, 2001, pages 377-391.
Market expectations of monetary policy; The Federal Reserve; The Federal Open Market Committee;
Other versions of this item:
- Söderström, Ulf, 1999. "Predicting monetary policy using federal funds futures prices," Working Paper Series in Economics and Finance 307, Stockholm School of Economics.
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
- G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
This paper has been announced in the following NEP Reports:
- NEP-ALL-2001-12-04 (All new papers)
- NEP-CBA-2001-12-04 (Central Banking)
- NEP-FMK-2001-12-04 (Financial Markets)
- NEP-MAC-2001-12-04 (Macroeconomics)
- NEP-MON-2001-12-04 (Monetary Economics)
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