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Daily Changes in Fed Funds Futures Prices

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  • James D. Hamilton

Abstract

This paper explores the properties of daily changes in the prices for near-term fed funds futures contracts. The paper finds these contracts to be excellent predictors of the fed funds rate, and shows that the claim of a nonzero term premium in the short-horizon contracts is more sensitive to outliers than previous research appears to have recognized. I find some statistically significant evidence of serial correlation in the daily changes, but this accounts for only a tiny part of the one-day movements and there is essentially zero predictability for horizons longer than one day. Settlement futures prices for each day appear to incorporate the information embodied in that day's term structure of longer-horizon Treasury securities. Previous employment growth makes a statistically significant contribution to predicting futures price changes, though again this could only account for a tiny part of the daily variance. The paper concludes that futures prices provide a very useful measure of the daily changes in the market's expectation of near-term changes in Fed policy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 13112.

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Date of creation: May 2007
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Publication status: published as James D. Hamilton, 2009. "Daily Changes in Fed Funds Futures Prices," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(4), pages 567-582, 06.
Handle: RePEc:nbr:nberwo:13112

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  1. Refet Gürkaynak & Brian Sack, 2005. "Do Actions Speak Louder Than Words?The Response of Asset Prices to Monetary Policy Actions and Statements," Computing in Economics and Finance 2005 323, Society for Computational Economics.
  2. Nelson, Daniel B, 1991. "Conditional Heteroskedasticity in Asset Returns: A New Approach," Econometrica, Econometric Society, vol. 59(2), pages 347-70, March.
  3. Glenn D. Rudebusch, 1996. "Do measures of monetary policy in a VAR make sense?," Working Papers in Applied Economic Theory 96-05, Federal Reserve Bank of San Francisco.
  4. Monika Piazzesi & Eric Swanson, 2004. "Futures Prices as Risk-adjusted Forecasts of Monetary Policy," NBER Working Papers 10547, National Bureau of Economic Research, Inc.
  5. Croushore, Dean & Stark, Tom, 2001. "A real-time data set for macroeconomists," Journal of Econometrics, Elsevier, vol. 105(1), pages 111-130, November.
  6. James D. Hamilton, 2008. "Daily Monetary Policy Shocks and the Delayed Response of New Home Sales," NBER Working Papers 14223, National Bureau of Economic Research, Inc.
  7. William Poole & Robert H. Rasche, 2000. "Perfecting the market's knowledge of monetary policy," Working Papers 2000-010, Federal Reserve Bank of St. Louis.
  8. Refet S. Gürkaynak & Brian Sack & Eric Swanson, 2002. "Market-based measures of monetary policy expectations," Finance and Economics Discussion Series 2002-40, Board of Governors of the Federal Reserve System (U.S.).
  9. Kenneth N. Kuttner, 2000. "Monetary policy surprises and interest rates: evidence from the Fed funds futures markets," Staff Reports 99, Federal Reserve Bank of New York.
  10. Swanson, Eric T., 2006. "Have Increases in Federal Reserve Transparency Improved Private Sector Interest Rate Forecasts?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 38(3), pages 791-819, April.
  11. John B. Carlson & Ben Craig & Patrick Higgins & William R. Melick, 2006. "FOMC communications and the predictability of near-term policy decisions," Economic Commentary, Federal Reserve Bank of Cleveland, issue Jun.
  12. 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.
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Cited by:
  1. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2011. "Geography, skills or both: What explains Fed watchers' forecast accuracy of US monetary policy?," Journal of Macroeconomics, Elsevier, vol. 33(3), pages 420-437, September.
  2. Gustavo Abarca & José Gonzalo Rangel & Guillermo Benavides, 2010. "Exchange Rate Market Expectations and Central Bank Policy: The case of the Mexican Peso-US Dollar from 2005-2009," Working Papers 2010-17, Banco de México.
  3. Joshua D. Angrist & Òscar Jordà & Guido Kuersteiner, 2013. "Semiparametric Estimates of Monetary Policy Effects: String Theory Revisited," NBER Working Papers 19355, National Bureau of Economic Research, Inc.
  4. Tideman, T. Nicolaus & Plassmann, Florenz, 2010. "Pricing externalities," European Journal of Political Economy, Elsevier, vol. 26(2), pages 176-184, June.
  5. Di Maggio, Marco, 2010. "The Political Economy of the Yield Curve," MPRA Paper 20697, University Library of Munich, Germany.
  6. Berger, Helge & Ehrmann, Michael & Fratzscher, Marcel, 2006. "Geography or skills: What explains Fed watchers’ forecast accuracy of US monetary policy?," Working Paper Series 0695, European Central Bank.
  7. José Gonzalo Rangel, 2009. "Macroeconomic News, Announcements, and Stock Market Jump Intensity Dynamics," Working Papers 2009-15, Banco de México.
  8. Gertler, Mark & Karadi, Peter, 2014. "Monetary Policy Surprises, Credit Costs and Economic Activity," CEPR Discussion Papers 9824, C.E.P.R. Discussion Papers.
  9. Andrea Monticini & Francesco Ravazzolo, 2014. "Forecasting the intraday market price of money," DISCE - Working Papers del Dipartimento di Economia e Finanza def10, Università Cattolica del Sacro Cuore, Dipartimenti e Istituti di Scienze Economiche (DISCE).
  10. Jean-Sébastien Fontaine, 2012. "Estimating the Policy Rule from Money Market Rates when Target Rate Changes Are Lumpy," Working Papers 12-41, Bank of Canada.
  11. Lahura, Erick, 2012. "Midiendo los efectos de la política monetaria a través de las expectativas de mercado," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 23, pages 39-52.
  12. Ghent, Andra, 2007. "Why do markets react badly to good news? Evidence from Fed Funds Futures," MPRA Paper 1708, University Library of Munich, Germany.
  13. Carlo Altavilla & Raffaella Giacomini & Riccardo Costantini, 2013. "Bond returns and market expectations," CeMMAP working papers CWP20/13, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  14. Coffinet, J., 2008. "La prévision des taux d’intérêt à partir de contrats futures : l’apport de variables économiques et financières," Working papers 193, Banque de France.

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