Interest Rate Derivatives and Monetary Policy Expectations

Jeremiah P. Boyle, Richard Crump, Emanuel Moench, Matthew Raskin, Carlo Rosa and Lisa Stowe

No 20141205b, Liberty Street Economics from Federal Reserve Bank of New York

Abstract: Market expectations of the path of future policy rates can have important implications for financial markets and the economy. Because interest rate derivatives enable market participants to hedge against or speculate on potential changes in various short-term U.S.interest rates, they are a rich and timely source of information on market expectations. In this post, we describe how information about market expectations can be derived from interest rate futures and forwards, focusing on three main instruments: federal funds futures, overnight index swaps (OIS), and Eurodollar futures. We also discuss how options on interest rate futures can be used to gain insight into the full distribution of rate expectations?information that cannot be gleaned from futures or forwards alone. In a forthcoming companion post, we explore an alternative source of policy rate expectations based on the two surveys conducted by the Trading Desk at the Federal Reserve Bank of New York.

Keywords: Interest rate derivatives; options; Monetary policy expectations (search for similar items in EconPapers)
JEL-codes: E5 G1 (search for similar items in EconPapers)
Date: 2014-12-05
New Economics Papers: this item is included in nep-mac and nep-mon
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