Predicting monetary policy using federal funds futures prices

Ulf Söderström ()

No 307, SSE/EFI Working Paper Series in Economics and Finance from Stockholm School of Economics

Abstract: 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.

Keywords: Market expectations of monetary policy; The Federal Reserve; The Federal Open Market Committee (search for similar items in EconPapers)
JEL-codes: E58 G13 G14 (search for similar items in EconPapers)
Pages: 32 pages
Date: 1999-03-08
New Economics Papers: this item is included in nep-fmk and nep-pol
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Citations: View citations in EconPapers (3)

Published in Journal of Futures Markets, 2001, pages 377-391.

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Working Paper: Predicting monetary policy using federal funds future prices (1999)
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