Working Paper: NBER ID: w10547
Authors: Monika Piazzesi; Eric Swanson
Abstract: Many researchers have used federal funds futures rates as measures of financial markets' expectations of future monetary policy. However, to the extent that federal funds futures reflect risk premia, these measures require some adjustment to account for these premia. In this paper, we document that excess returns on federal funds futures have been positive on average and strongly countercyclical. In particular, excess returns are surprisingly well predicted by macroeconomic indicators such as employment growth and financial business-cycle indicators such as Treasury yield spreads and corporate bond spreads. Excess returns on eurodollar futures display similar patterns. We document that simply ignoring these risk premia has important consequences for the expected future path of monetary policy. We also show that risk premia matter for some futures-based measures of monetary policy surprises used in the literature.
Keywords: No keywords provided
JEL Codes: G0; G1
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| employment growth (O49) | excess returns on federal funds futures (E43) |
| financial business cycle indicators (E32) | excess returns on federal funds futures (E43) |
| economic downturns (F44) | excess returns on federal funds futures (E43) |
| risk adjustments (G22) | accuracy of monetary policy forecasts (E47) |
| failure to account for risk premia (G19) | forecast errors (C53) |