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Federal Reserve Bank of San Francisco
Working Paper Series
Futures prices as risk-adjusted forecasts of monetary policy
Monika Piazzesi
Eric T. Swanson

Many researchers have used federal funds futures rates as measures of financial markets' expectations of future monetary policy. However, to the extent that federal funds futures reflect risk premia, these measures require some adjustment. In this paper, we document that excess returns on federal funds futures have been positive on average and strongly countercyclical. In particular, excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business-cycle indicators such as Treasury yield spreads and corporate bond spreads. Excess returns on eurodollar futures display similar patterns. We document that simply ignoring these risk premia significantly biases forecasts of the future path of monetary policy. We also show that risk premia matter for some futures-based measures of monetary policy shocks used in the literature.

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Monika Piazzesi & Eric T. Swanson, Futures prices as risk-adjusted forecasts of monetary policy, Federal Reserve Bank of San Francisco, Working Paper Series 2006-23, 2006.
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Keywords: Federal funds rate ; Federal funds market (United States) ; Monetary policy
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