Predicting the Fed

Kenneth B. Petersen () and Vladimir Pozdnyakov
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Vladimir Pozdnyakov: University of Connecticut

No 2008-07, Working papers from University of Connecticut, Department of Economics

Abstract: Predicting the federal funds rate and beating the federal funds futures market: mission impossible? Not so. We employ a Markov transition process and show that this model outperforms the federal funds futures market in predicting the target federal funds rate. Thus, by using purely historical data we are able to better explain future monetary policy than a forward looking measure like the federal funds futures rate. The fact that the federal funds futures market can be beaten by a statistical model, suggests that the federal funds futures market lacks eciency. The mar- ket allocates too much weight to current Federal Reserve communication and other real-time macro events, and allocates too little weight to past monetary policy behavior.

Keywords: Monetary policy; Federal funds futures market; Markov modeling (search for similar items in EconPapers)
JEL-codes: E44 E47 E52 E58 G13 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-cba, nep-for, nep-mac and nep-mon
Date: 2008-03
Note: The views expressed here do not necessarily reflect the opinion and views of Laffer Associates.
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