IDEAS home Printed from https://ideas.repec.org/a/fip/fedaer/y2002iq2p45-61nv.87no.2.html
   My bibliography  Save this article

The behavior of federal funds futures prices over the monetary policy cycle

Author

Listed:
  • Jeff Moore
  • Richard Austin

Abstract

The 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.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedaer:y:2002:i:q2:p:45-61:n:v.87no.2
    as

    Download full text from publisher

    File URL: http://www.frbatlanta.org/filelegacydocs/moore_2q02.pdf
    Download Restriction: no

    References listed on IDEAS

    as
    1. 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.
    2. 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.
    3. Joel T. Krueger & Kenneth N. Kuttner, 1996. "The Fed funds futures rate as a predictor of federal reserve policy," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(8), pages 865-879, December.
    4. 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.
    5. 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.
    6. Antulio N. Bomfim & Vincent 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.).
    7. 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.
    8. 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.
    9. William Poole & Robert Rasche, 2000. "Perfecting the Market's Knowledge of Monetary Policy," Journal of Financial Services Research, Springer;Western Finance Association, pages 255-298.
    10. Joe Lange & Brian P. Sack & William C. 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.).
    11. 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.
    12. Söderström, Ulf, 1999. "Predicting monetary policy using federal funds future prices," Working Paper Series 85, Sveriges Riksbank (Central Bank of Sweden).
    13. Roberto Rigobon & Brian P. Sack, 2002. "The Impact of Monetary Policy on Asset Prices," Finance and Economics Discussion Series 2002-04, Board of Governors of the Federal Reserve System (U.S.).
    14. Ulf Söderström, 2001. "Predicting monetary policy with federal funds futures prices," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 21(4), pages 377-391, April.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. 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.).
    2. O. David Gulley & Jahangir Sultan, 2011. "Economics, politics and the federal funds markets: does the Fed play politics?," Applied Financial Economics, Taylor & Francis Journals, pages 1005-1019.
    3. Kenneth B. Petersen & Vladimir Pozdnyakov, 2008. "Predicting the Fed," Working papers 2008-07, University of Connecticut, Department of Economics.
    4. 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.
    5. Adrienne Kearney & Raymond Lombra, 2003. "Fed funds futures and the news," Atlantic Economic Journal, Springer;International Atlantic Economic Society, pages 330-337.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:fip:fedaer:y:2002:i:q2:p:45-61:n:v.87no.2. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Meredith Rector). General contact details of provider: http://edirc.repec.org/data/frbatus.html .

    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 CitEc recognized a reference but did not link an item in RePEc 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 RePEc Author Service 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.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.