Journal Article

Using federal funds futures rates to predict Federal Reserve actions

Abstract: The federal funds futures rate naturally embodies the market's expectation of the average behavior of the federal funds rate. But, as John C. Robertson and Daniel L. Thornton explain, analysts cannot attempt to identify Fed policy from the behavior of the federal funds futures rate without making somewhat arbitrary additional assumptions. The authors investigate the predictive accuracy of a rule based on the federal funds futures rate from October 1988 through August 1997 using an assumption that is sufficient for partially identifying when the market is expecting a Fed action but not for predicting the magnitude of the action. Their forecasting rule correctly predicts a target change at the one-month horizon only about one-third of the time. They conclude that more research is needed, especially in light of the FOMC's recent practice of disclosing policy decisions immediately after FOMC meetings.

Keywords: Federal funds market (United States); Futures; Monetary policy - United States;

Bibliographic Information

Provider: Federal Reserve Bank of St. Louis

Part of Series: Review

Publication Date: 1997

Issue: Nov

Pages: 45-53