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Predicting monetary policy using federal funds futures prices




In theory, prices of current-month federal funds futures contracts should reflect market expectations of near-term movements in the Federal Reserve's target level for the federal funds rate. However, empirical results show that such measures of market expectations are too noisy to predict day-to-day changes in the funds rate target; partly due to time aggregation problems, partly because they are affected by funds rate movements not directly related to monetary policy considerations. In particular, the futures market shows a large amount of systematic variation across months and trading days, variation that needs to be taken into account when predicting policy moves or extracting policy expectations. For the period from January 1994 to February 1998, the extracted expectations perform fairly well in predicting the target level that will prevail after the next meeting of the Federal Open Market Committee, expecially when adjusting for market regularities.

Suggested Citation

  • Söderström, Ulf, 1999. "Predicting monetary policy using federal funds futures prices," SSE/EFI Working Paper Series in Economics and Finance 307, Stockholm School of Economics.
  • Handle: RePEc:hhs:hastef:0307

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    References listed on IDEAS

    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.
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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. Monticini & Vaciago, 2004. "Are Europe Interest Rates led by FED's Announcements?," Macroeconomics 0407025, EconWPA.
    3. Kjellberg, David, 2006. "Measuring Expectations," Working Paper Series 2006:9, Uppsala University, Department of Economics.
    4. Martin Hlusek, 2002. "Estimating Market Probabilities of Future Interest Rate Changes," Working Papers 2002/02, Czech National Bank, Research Department.
    5. 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.
    6. 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.

    More about this item


    Market expectations of monetary policy; The Federal Reserve; The Federal Open Market Committee;

    JEL classification:

    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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