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What Fed Funds Futures Tell Us About Monetary Policy Uncertainty

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  • Jean-Sébastien Fontaine

Abstract

The uncertainty around future changes to the Federal Reserve target rate varies over time. In our results, the main driver of uncertainty is a “path” factor signaling information about future policy actions, which is filtered from federal funds futures data. The uncertainty is highest when it signals a loosening cycle. The uncertainty raises the risk premium in a loosening cycle, reducing the transmission of target changes to longer maturities. Our results trace the information content of federal funds futures to hedging demand.

Suggested Citation

  • Jean-Sébastien Fontaine, 2016. "What Fed Funds Futures Tell Us About Monetary Policy Uncertainty," Staff Working Papers 16-61, Bank of Canada.
    • Handle: RePEc:bca:bocawp:16-61
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    Citations

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    Cited by:

    1. Andreas Neuhierl & Michael Weber & Michael Weber, 2017. "Monetary Momentum," CESifo Working Paper Series 6648, CESifo.
    2. Peter Tillmann, 2020. "Monetary Policy Uncertainty and the Response of the Yield Curve to Policy Shocks," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 52(4), pages 803-833, June.
    3. Neuhierl, Andreas & Weber, Michael, 2019. "Monetary policy communication, policy slope, and the stock market," Journal of Monetary Economics, Elsevier, vol. 108(C), pages 140-155.
    4. Rodrigo Calcagni T., 2020. "Implied monetary policy extracted from interest rate swaps in Chile," Revista de Analisis Economico – Economic Analysis Review, Universidad Alberto Hurtado/School of Economics and Business, vol. 35(2), pages 3-27, October.
    5. Andreas Neuhierl & Michael Weber, 2016. "Monetary Policy and the Stock Market: Time-Series Evidence," NBER Working Papers 22831, National Bureau of Economic Research, Inc.
    6. Tatjana Dahlhaus & Tatevik Sekhposyan, 2018. "Monetary Policy Uncertainty: A Tale of Two Tails," Staff Working Papers 18-50, Bank of Canada.

    More about this item

    Keywords

    Asset Pricing; Financial markets; Interest rates;
    All these keywords.

    JEL classification:

    • E43 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Interest Rates: Determination, Term Structure, and Effects
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • E47 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Forecasting and Simulation: Models and Applications
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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