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The nature and impact of the market forecasting errors in the Federal funds futures market

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  • Dunbar, Kwamie
  • Amin, Abu S.

Abstract

In this paper we examine the impact of the forecasting errors arising from a monetary policy shock arising in the Federal funds rate market. Our empirical results indicate that forecasting errors in the Federal funds futures market do have implications for the asset market's natural price discovery process, since expectations in this market affect long term interest rates and inflation. We also find that the price discovery process may be exacerbated if the policy transmission mechanism is more pronounced under a transparency objective because of the negative feedback loop mechanism. The results further show that the aggregate demand and inflation expectations channels appear to be much more pronounced under the Bernanke regime than Greenspan leading to a much stronger policy transmission. In fact a policy tightening through both channels would have a visibly stronger deflationary and employment impact under Bernanke relative to Greenspan.

Suggested Citation

  • Dunbar, Kwamie & Amin, Abu S., 2015. "The nature and impact of the market forecasting errors in the Federal funds futures market," The North American Journal of Economics and Finance, Elsevier, vol. 31(C), pages 174-192.
  • Handle: RePEc:eee:ecofin:v:31:y:2015:i:c:p:174-192
    DOI: 10.1016/j.najef.2014.11.002
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    More about this item

    Keywords

    Federal funds futures; Federal funds rate; Monetary policy transmission; Forecasting errors;
    All these keywords.

    JEL classification:

    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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