Reconciling Survey- and Market-Based Expectations for the Policy Rate

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

Discussion Paper

Reconciling Survey- and Market-Based Expectations for the Policy Rate

Abstract: In our previous post, we showed that the gap between the market-implied path for the federal funds rate and the survey-implied mean expectations for the federal funds rate from the Survey of Primary Dealers (SPD) and the Survey of Market Participants (SMP) narrowed from the December survey to the January survey. In particular, we provided explanations for this narrowing as well as for the subsequent widening from January to March. This post continues the discussion by presenting a novel approach called ?tilting? that yields insights by measuring how much the survey probability distributions have to be altered to match the market-implied path of the federal funds rate. We interpret any discrepancy between the original and tilted distributions as arising from either risk premia or dispersion in beliefs.

Keywords: policy rate; survey expectations; KLIC;

JEL Classification: E5; G1;