Explaining and Forecasting the US Federal Funds Rate

Frontmatter

Introduction

Abstract

Explaining and Forecasting the US Federal Funds Rate has been written very much with financial market participants, such as dealers, fund managers and treasurers, in mind. It is designed to offer a specific explanation as to why interest rates, specifically the federal funds rate (FFR), may be set at a particular level. It also offers a scientific method of explaining the prevailing FFR, and a means to make forecasts of the future rate.

Matthew Clements

Chapter 1. Monetary Policy Models

Abstract

This chapter discusses the emergence of monetary policy models in the United States and presents a detailed overview of the most celebrated monetary policy model, the Taylor rule.

Matthew Clements

Chapter 2. Monetary Policy at the US Federal Reserve

Abstract

The Fed describes monetary policy as ‘actions undertaken … to influence the availability and cost of money and credit to help promote national economic goals’. The Federal Reserve Act specifies that in conducting monetary policy, the Federal Open Market Committee (FOMC) should seek ‘to promote effectively the goals of maximum employment, stable prices, and moderate long term interest rates’.

Matthew Clements

Chapter 3. The Monetary Policy Model (MPM)

Abstract

Now we have considered the major policy shifts of the Fed since 1970 and analysed perhaps the best-known monetary policy model for the United States, the Taylor rule, this chapter presents a new version based on an empirical study of Fed policy.

Matthew Clements

Chapter 4. Making FFR forecasts using the MPM

Abstract

The value of the MPM lies in its ability not only to explain the prevailing FFR, but to forecast future FFR levels. The performance of the model since 1980 when using annual data means that the use of dependable annual economic forecasts for GDP and inflation should produce estimates of the FFR for forthcoming years. This chapter looks at the economic projections of the US Congressional Budget Office (CBO), uses the CBO’s economic projections from 1987 to 2002 in the MPM, then compares the results with the actual FFR.

Matthew Clements

Chapter 5. Comparing MPM Results with the Eurodollar Futures Market

Abstract

This chapter assesses the value of the MPM forecasts described in Chapter 4 compared with the FFR implied by the corresponding three month eurodollar interest rate future at the time the forecasts were made. This is achieved by comparing MPM results with historical data on eurodollar futures going back to 1987. This year is taken as the starting point of comparisons since the volume or liquidity of eurodollar futures trading prior to 1987 was insufficient to provide a reliable indication of market expectations of the future direction of the FFR.

Matthew Clements

Backmatter