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Article: How well does the federal funds futures rate predict the future federal funds rate?
- Article from:
- Economic Commentary (Cleveland)
- Article date:
- October 1, 2001
- Author:
CopyrightCOPYRIGHT 2001 Federal Reserve Bank of Cleveland. This material is published under license from the publisher through the Gale Group, Farmington Hills, Michigan. All inquiries regarding rights should be directed to the Gale Group. (Hide copyright information)
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Contrary to popular belief, federal funds futures rates do not tell us precisely where the market thinks federal funds rates will be in the future. On average, futures rates overpredict future fed funds rates, and, depending on whether fed funds rates are falling or rising, the futures rate may consistently overestimate or underestimate the future fed funds rates. To obtain a reliable estimate of the future fed funds rate, one must adjust the fed funds futures rate appropriately to account for the bias and past movements of the fed funds rate.
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