The Relative Effectiveness of the Fed Funds Futures and the Federal Open Market Committee (FOMC) Dot Plots in Predicting the Future Federal Funds Rate

Abstract

This article contrasts the predictive ability of the Fed funds futures versus the Federal Open Market Committee’s (FOMC’s) projections, as expressed in their dot plots. The results reveal that Fed funds futures are consistently better in predicting the prevailing Fed funds effective rate as compared with the standard aggregates (mean, median, and mode) of the dot plots of the Fed policy makers. This article’s distinctive contribution to the literature stems from the fact that it provides evidence that the dot plots contributed a great deal toward increasing Fed transparency and are helpful in forecasting the effective Federal funds rate by the markets. One implication of these results is that dot plots should be best interpreted in conjunction with the Fed funds rates implied in the Fed funds futures contracts.

TOPICS: Futures and forward contracts, fixed income and structured finance, statistical methods, information providers/credit ratings