Title

Recovering Market Expectations of FOMC Rate Changes with Options on Federal Funds Futures

Document Type

Article

Publication Date

12-2005

Abstract

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.

Journal

Journal of Futures Markets

Volume

26

Issue

12

First Page

1203

Last Page

1242