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Discussion Paper

Elevated Option-Implied Interest Rate Volatility and Downside Risks to Economic Activity


Abstract: Measures of uncertainty about U.S. short maturity interest rates derived from options have risen sharply since October 2021, reaching their highest levels in more than a decade. This note first uses survey-based measures of economic uncertainty to argue that this increase in option-implied measures likely reflect higher uncertainty about inflation, the associated monetary policy response, and the perceived resulting downside risks to economic activity.

https://doi.org/10.17016/2380-7172.3404

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Bibliographic Information

Provider: Board of Governors of the Federal Reserve System (U.S.)

Part of Series: FEDS Notes

Publication Date: 2023-12-22

Number: 2023-12-22