How Do Survey- and Market-Based Expectations of the Policy Rate Differ?

Brodsky, Bonni; Del Negro, Marco; Fiorica, Joseph; LeSueur, Eric; Morse, Ari; Rodrigues, Anthony P.

Discussion Paper

How Do Survey- and Market-Based Expectations of the Policy Rate Differ?

Abstract: Over the past year, market pricing on interest rate derivatives linked to the federal funds rate has suggested a significantly lower expected path of the policy rate than responses to the New York Fed’s Survey of Primary Dealers (SPD) and Survey of Market Participants (SMP). However, this gap narrowed considerably from December 2015 to January 2016, before widening slightly at longer horizons in March. This post argues that the narrowing between December and January was mostly the result of survey respondents placing greater weight on lower rate outcomes, while the subsequent widening between January and March likely reflects an increased demand for insurance against states of the world where the policy rate remains at very low levels.

Keywords: policy rate; survey expectations;

JEL Classification: E5; G1;