Federal Funds Futures as an Indicator of Future Monetary Policy: A Primer
Unlike most futures contracts, which are drawn on commodities or financial instruments whose price or yield is determined in competitive markets, the federal funds futures rate is essentially determined by a deliberative decision of the Federal Open Market Committee (FOMC). As such, the fed funds futures market is a place where one can place a bet as to what future monetary policy will be. The FOMC can thus assess in fairly precise terms what markets expect it to do. In this paper, the authors examine the predictive accuracy of the fed funds futures market and consider some policy implications. They find that accuracy clearly improves in the two-month period leading up to the contract's expiration and that the largest prediction errors occur around policy turning points.
Suggested citation: Carlson, John, Jean McIntire, and James Thomson. “Federal Funds Futures as an Indicator of Future Monetary Policy: A Primer,” Federal Reserve Bank of Cleveland, Economic Review, vol. 31, no. 1, pp. 20-30, 01.01.1995.