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Using federal funds futures contracts for monetary policy analysis

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  • Refet S. Gürkaynak

Abstract

Federal funds futures are popular tools for calculating market-based monetary policy surprises. These surprises are usually thought of as the difference between expected and realized federal funds target rates at the current FOMC meeting. This paper demonstrates the use of federal funds futures contracts to measure how FOMC announcements lead to changes in expected interest rates after future FOMC meetings. Using several 'surprises' at different horizons, timing, level, and slope components of unanticipated policy actions are defined. These three components have differing effects on asset prices that are not captured by the contemporaneous surprise measure.

Suggested Citation

  • 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.).
    • Handle: RePEc:fip:fedgfe:2005-29
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    Cited by:

    1. Alan S. Blinder & Michael Ehrmann & Marcel Fratzscher & Jakob De Haan & David-Jan Jansen, 2008. "Central Bank Communication and Monetary Policy: A Survey of Theory and Evidence," Journal of Economic Literature, American Economic Association, vol. 46(4), pages 910-945, December.
    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. C.Jardet & A. Monks, 2014. "Euro Area monetary policy shocks: impact on financial asset prices during the crisis?," Working papers 512, Banque de France.
    4. Malte Knüppel & Guido Schultefrankenfeld, 2017. "Interest rate assumptions and predictive accuracy of central bank forecasts," Empirical Economics, Springer, vol. 53(1), pages 195-215, August.
    5. Claus Brand & Daniel Buncic & Jarkko Turunen, 2010. "The Impact of ECB Monetary Policy Decisions and Communication on the Yield Curve," Journal of the European Economic Association, MIT Press, vol. 8(6), pages 1266-1298, December.
    6. Levin, Andrew & Gürkaynak, Refet & Swanson, Eric T., 2006. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden," CEPR Discussion Papers 5808, C.E.P.R. Discussion Papers.
    7. Patrice T. Robitaille & Jennifer E. Roush, 2006. "How do FOMC actions and U.S. macroeconomic data announcements move Brazilian sovereign yield spreads and stock prices?," International Finance Discussion Papers 868, Board of Governors of the Federal Reserve System (U.S.).
    8. Aron Drew & Özer Karagedikli, 2007. "Some Benefits of Monetary-Policy Transparency in New Zealand," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 57(11-12), pages 521-539, December.
    9. Michael Woodford, 2005. "Central bank communication and policy effectiveness," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, issue Aug, pages 399-474.
    10. Kjellberg, David, 2006. "Measuring Expectations," Working Paper Series 2006:9, Uppsala University, Department of Economics.
    11. Refet S Gürkaynak & Brian Sack & Eric Swanson, 2005. "Do Actions Speak Louder Than Words? The Response of Asset Prices to Monetary Policy Actions and Statements," International Journal of Central Banking, International Journal of Central Banking, vol. 1(1), May.
    12. Kurov, Alexander, 2010. "Investor sentiment and the stock market's reaction to monetary policy," Journal of Banking & Finance, Elsevier, vol. 34(1), pages 139-149, January.
    13. Hamilton, James D., 2008. "Daily monetary policy shocks and new home sales," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1171-1190, October.
    14. Michael Ehrmann & Marcel Fratzscher, 2009. "Global Financial Transmission of Monetary Policy Shocks," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(6), pages 739-759, December.
    15. Tsiaras, Stylianos, 2023. "Asset purchases, limited asset markets participation and inequality," Journal of Economic Dynamics and Control, Elsevier, vol. 154(C).
    16. Ehrmann, Michael & Fratzscher, Marcel, 2005. "How should central banks communicate?," Working Paper Series 557, European Central Bank.
    17. Koepke, Robin, 2014. "Fed Policy Expectations and Portfolio Flows to Emerging Markets," MPRA Paper 63519, University Library of Munich, Germany, revised 07 Apr 2015.
    18. Demiralp, Selva & Yılmaz, Kamil, 2012. "Asymmetric response to monetary policy surprises at the long-end of the yield curve," Journal of Macroeconomics, Elsevier, vol. 34(2), pages 404-418.
    19. Jakob Haan, 2008. "The effect of ECB communication on interest rates: An assessment," The Review of International Organizations, Springer, vol. 3(4), pages 375-398, December.
    20. Kenneth B. Petersen & Vladimir Pozdnyakov, 2008. "Predicting the Fed," Working papers 2008-07, University of Connecticut, Department of Economics.
    21. James D. Hamilton, 2007. "Assessing Monetary Policy Effects Using Daily Fed Funds Futures Contracts," NBER Working Papers 13569, National Bureau of Economic Research, Inc.
    22. Mr. Andrew J Swiston, 2007. "Where Have the Monetary Surprises Gone? The Effects of FOMC Statements," IMF Working Papers 2007/185, International Monetary Fund.
    23. Jung, Alexander, 2023. "Are monetary policy shocks causal to bank health? Evidence from the euro area," Journal of Macroeconomics, Elsevier, vol. 75(C).
    24. Jung, Alexander, 2023. "US monetary policy spillovers to European banks," Working Paper Series 2876, European Central Bank.
    25. J-P. Renne, 2014. "Options Embedded in ECB Targeted Refinancing Operations," Working papers 518, Banque de France.

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    Keywords

    Monetary policy; Federal funds rate; Federal funds market (United States);
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