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Using federal funds futures rates to predict Federal Reserve actions

Author

Listed:
  • John C. Robertson
  • Daniel L. Thornton

Abstract

The federal funds futures rate naturally embodies the market's expectation of the average behavior of the federal funds rate. But, as John C. Robertson and Daniel L. Thornton explain, analysts cannot attempt to identify Fed policy from the behavior of the federal funds futures rate without making somewhat arbitrary additional assumptions. The authors investigate the predictive accuracy of a rule based on the federal funds futures rate from October 1988 through August 1997 using an assumption that is sufficient for partially identifying when the market is expecting a Fed action but not for predicting the magnitude of the action. Their forecasting rule correctly predicts a target change at the one-month horizon only about one-third of the time. They conclude that more research is needed, especially in light of the FOMC's recent practice of disclosing policy decisions immediately after FOMC meetings.

Suggested Citation

  • 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.
  • Handle: RePEc:fip:fedlrv:y:1997:i:nov:p:45-53
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    File URL: https://files.stlouisfed.org/files/htdocs/publications/review/97/11/9711dt.pdf
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    References listed on IDEAS

    as
    1. 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.
    2. Michael R. Pakko & David C. Wheelock, 1996. "Monetary policy and financial market expectations: what did they know and when did they know it?," Review, Federal Reserve Bank of St. Louis, issue Jul, pages 19-32.
    Full references (including those not matched with items on IDEAS)

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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. The risk of a collision between the Federal Reserve and the markets
      by zooeygoethe in Economic Objectorvism on 2007-11-17 23:42:21

    Citations

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    Cited by:

    1. Dominique Guégan & Florian Ielpo, 2008. "Flexible time series models for subjective distribution estimation with monetary policy in view," Brussels Economic Review, ULB -- Universite Libre de Bruxelles, vol. 51(1), pages 79-103.
    2. Gurkaynak, Refet S. & Sack, Brian T. & Swanson, Eric P., 2007. "Market-Based Measures of Monetary Policy Expectations," Journal of Business & Economic Statistics, American Statistical Association, vol. 25, pages 201-212, April.
    3. William Poole & Robert Rasche, 2000. "Perfecting the Market's Knowledge of Monetary Policy," Journal of Financial Services Research, Springer;Western Finance Association, vol. 18(2), pages 255-298, December.
    4. Sarno, Lucio & Thornton, Daniel L., 2003. "The dynamic relationship between the federal funds rate and the Treasury bill rate: An empirical investigation," Journal of Banking & Finance, Elsevier, vol. 27(6), pages 1079-1110, June.
    5. Söderström, Ulf, 1999. "Predicting monetary policy using federal funds future prices," Working Paper Series 85, Sveriges Riksbank (Central Bank of Sweden).
    6. 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.
    7. Martin Hlusek, 2002. "Estimating Market Probabilities of Future Interest Rate Changes," Working Papers 2002/02, Czech National Bank, Research Department.
    8. Adrienne Kearney & Raymond Lombra, 2003. "Fed funds futures and the news," Atlantic Economic Journal, Springer;International Atlantic Economic Society, vol. 31(4), pages 330-337, December.
    9. 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.
    10. Thornton, Daniel L., 2000. "The relationship between the federal funds rate and the Fed's federal funds rate target: is it open market or open mouth operations?," Discussion Paper Series 1: Economic Studies 2000,09, Deutsche Bundesbank.
    11. Gabriel Pérez Quirós & Jorge Sicilia, 2002. "Is the European Central Bank (and the United States Federal Reserve) predictable?," Working Papers 0229, Banco de España;Working Papers Homepage.
    12. N. K. Kishor & H. A. Marfatia, 2013. "Does federal funds futures rate contain information about the treasury bill rate?," Applied Financial Economics, Taylor & Francis Journals, vol. 23(16), pages 1311-1324, August.
    13. Daniel L. Thornton, 1998. "Tests of the market's reaction to federal funds rate target changes," Review, Federal Reserve Bank of St. Louis, issue Nov, pages 25-36.
    14. Kevin Ross, 2002. "Market Predictability of ECB Policy Decisions; A Comparative Examination," IMF Working Papers 02/233, International Monetary Fund.
    15. Kenneth B. Petersen & Vladimir Pozdnyakov, 2008. "Predicting the Fed," Working papers 2008-07, University of Connecticut, Department of Economics.
    16. Raymond E. Owens & Roy H. Webb, 2001. "Using the federal funds futures market to predict monetary policy actions," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 69-77.
    17. V. Vance Roley & Gordon H. Sellon, 1998. "Market reaction to monetary policy nonannouncements," Research Working Paper 98-06, Federal Reserve Bank of Kansas City.
    18. Brian P. Sack, 2002. "Extracting the expected path of monetary policy from futures rates," Finance and Economics Discussion Series 2002-56, Board of Governors of the Federal Reserve System (U.S.).

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