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How Do Financial Markets Perceive the Balance of Risks to the Policy Rate?

Author

Listed:
  • Brent Bundick
  • Taeyoung Doh
  • Andrew Lee Smith

Abstract

We introduce a new measure of policy rate skew that uses interest rate options prices to summarize market-perceived risks to future short-term interest rates. A positive value of policy rate skew indicates financial markets believe interest rates are more likely to end up higher than projected, whereas a negative value suggests rates could end up lower than projected. As of October 2024, our measure of policy rate skew is near zero, suggesting market-perceived risks to the interest rate outlook are roughly in balance.

Suggested Citation

  • Brent Bundick & Taeyoung Doh & Andrew Lee Smith, 2024. "How Do Financial Markets Perceive the Balance of Risks to the Policy Rate?," Economic Bulletin, Federal Reserve Bank of Kansas City, pages 1-4, December.
    • Handle: RePEc:fip:fedkeb:99292
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    References listed on IDEAS

    as
    1. Alan Greenspan, 2004. "Risk and Uncertainty in Monetary Policy," American Economic Review, American Economic Association, vol. 94(2), pages 33-40, May.
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