Market-Based Measures of Monetary Policy Expectations


Refet S. Gürkaynak

Brian P. Sack

Eric T. Swanson

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2006-04 | January 1, 2006

A number of recent papers have used different financial market instruments to measure near-term expectations of the federal funds rate and the high-frequency changes in these instruments around FOMC announcements to measure monetary policy shocks. This paper evaluates the empirical success of a variety of financial market instruments in predicting the future path of monetary policy. All of the instruments we consider provide forecasts that are clearly superior to those of standard time series models at all of the horizons considered. Among financial market instruments, we find that federal funds futures dominate all the other securities in forecasting monetary policy at horizons out to six months. For longer horizons, the predictive power of many of the instruments we consider is very similar. In addition, we present evidence that monetary policy shocks computed using the current-month federal funds futures contract are influenced by changes in the timing of policy actions that do not influence the expected course of policy beyond a horizon of about six weeks. We propose an alternative shock measure that captures changes in market expectations of policy over slightly longer horizons.

Article Citation

Sack, Brian P., Eric T. Swanson, and Refet S. Gürkaynak. 2006. “Market-Based Measures of Monetary Policy Expectations,” Federal Reserve Bank of San Francisco Working Paper 2006-04. Available at