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.
Part of Series: FEDS Notes
Publication Date: 2023-12-22