Recovering Market Expectations of FOMC Rate Changes with Options on Federal Funds Futures
U.S. Federal Open Market Committee (FOMC) meetings command a great deal of attention because at these meetings changes occur in the federal funds rate. Analysts have used a variety of means to estimate the probability and amount of any potential rate change, such as extracting estimates from the prices of federal funds futures contracts. The authors describe a technique that uses prices of traded options on federal funds futures contracts to recover the implied probability density function (PDF) for future FOMC interest rate decisions. This relatively simple method provides PDFs for individual and multiple FOMC meetings. The techniques should help market analysts determine the market consensus view of the future stance of monetary policy.
Melick, William Robert; Carlson, John B.; and Craig, Ben R., "Recovering Market Expectations of FOMC Rate Changes with Options on Federal Funds Futures" (2005). Journal of Futures Markets 26(12): 1203-1242. Faculty Publications. Paper 23.
Journal of Futures Markets