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Predicting monetary policy with federal funds futures prices

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  • Ulf Söderström

Abstract

In theory, prices of current‐month federal funds futures contracts should reflect market expectations of near‐term movements in the federal funds rate and thus the Federal Reserve's funds rate target. This article shows that futures‐based proxies for funds rate expectations have weak predictive power for the average funds rate using daily data but are more successful in predicting the average funds rate and the funds rate target around target changes and meetings of the Federal Open Market Committee. However, the futures‐based expectations have a systematic bias related to the last days of the month and, in particular, calendar months. © 2001 John Wiley & Sons, Inc. Jrl Fut Mark 21:377–391, 2001

Suggested Citation

  • 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.
    • Handle: RePEc:wly:jfutmk:v:21:y:2001:i:4:p:377-391
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    Cited by:

    1. 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.
    2. 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.).
    3. Richard Austin & Jeff Moore, 2002. "The behavior of federal funds futures prices over the monetary policy cycle," Economic Review, Federal Reserve Bank of Atlanta, vol. 87(Q2), pages 45-61.
    4. Carlo Altavilla & Raffaella Giacomini & Riccardo Costantini, 2014. "Bond Returns and Market Expectations," Journal of Financial Econometrics, Oxford University Press, vol. 12(4), pages 708-729.
    5. Schmeling, Maik & Schrimpf, Andreas & Steffensen, Sigurd A.M., 2022. "Monetary policy expectation errors," Journal of Financial Economics, Elsevier, vol. 146(3), pages 841-858.
    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. Henkel, Lukas, 2020. "Sectoral output effects of monetary policy: do sticky prices matter?," Working Paper Series 2473, European Central Bank.
    8. Dunbar, Kwamie & Owusu-Amoako, Johnson, 2023. "Predicting inflation expectations: A habit-based explanation under hedging," International Review of Financial Analysis, Elsevier, vol. 89(C).
    9. 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.).

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