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Predicting the Fed

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Author Info
Kenneth B. Petersen (Laffer Associates and University of Connecticut)
Vladimir Pozdnyakov (University of Connecticut)

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Abstract

Predicting the federal funds rate and beating the federal funds futures market: mission impossible? Not so. We employ a Markov transition process and show that this model outperforms the federal funds futures market in predicting the target federal funds rate. Thus, by using purely historical data we are able to better explain future monetary policy than a forward looking measure like the federal funds futures rate. The fact that the federal funds futures market can be beaten by a statistical model, suggests that the federal funds futures market lacks eciency. The mar- ket allocates too much weight to current Federal Reserve communication and other real-time macro events, and allocates too little weight to past monetary policy behavior.

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File URL: http://www.econ.uconn.edu/working/2008-07.pdf
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Publisher Info
Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2008-07.

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Length: 25 pages
Date of creation: Mar 2008
Date of revision:
Handle: RePEc:uct:uconnp:2008-07

Note: The views expressed here do not necessarily reflect the opinion and views of Laffer Associates.
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Related research
Keywords: Monetary policy Federal funds futures market Markov modeling

Find related papers by JEL classification:
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
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

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References listed on IDEAS
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.:
  1. Jeff Moore & Richard Austin, 2002. "The behavior of federal funds futures prices over the monetary policy cycle," Economic Review, Federal Reserve Bank of Atlanta, issue Q2, pages 45-61. [Downloadable!]
  2. William Poole, 2000. "How well do the markets understand Fed policy?," Speech, Federal Reserve Bank of St. Louis. [Downloadable!]
  3. William Poole, 2005. "How predictable is Fed policy?," Speech, Federal Reserve Bank of St. Louis. [Downloadable!]
    Other versions:
  4. Söderlind, Paul & Söderström, Ulf & Vredin, Anders, 2003. "Taylor Rules and the Predictability of Interest Rates," CEPR Discussion Papers 3934, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  5. 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. [Downloadable!] (restricted)
    Other versions:
  6. 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. [Downloadable!]
  7. Monika Piazzesi, 2005. "Bond Yields and the Federal Reserve," Journal of Political Economy, University of Chicago Press, vol. 113(2), pages 311-344, April.
  8. Monika Piazzesi & Eric T. Swanson, 2006. "Futures prices as risk-adjusted forecasts of monetary policy," Working Paper Series 2006-23, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
  9. John H. Cochrane & Monika Piazzesi, 2002. "The Fed and Interest Rates--A High-Frequency Identification," American Economic Review, American Economic Association, vol. 92(2), pages 90-95, May. [Downloadable!] (restricted)
    Other versions:
  10. Refet S. Gürkaynak, 2005. "Using federal funds futures contracts for monetary policy analysis," Finance and Economics Discussion Series 2005-29, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
  11. William Poole, 2007. "Understanding the Fed," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 3-14. [Downloadable!]
    Other versions:
  12. Lange, Joe & Sack, Brian & Whitesell, William, 2003. " Anticipations of Monetary Policy in Financial Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 35(6), pages 889-909, December.
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