What do Fed Funds Futures tell us about Monetary Policy Uncertainty

Abstract

The uncertainty around future changes to the Federal Reserve target rate varies over time. In our results, the main driver of uncertainty is a ``path'' factor signaling information about future policy actions, which is filtered from federal funds futures data. The uncertainty is lowest when the path factor signals a hiking cycle and highest when it signals a loosening cycle. The uncertainty raises the risk premium in a loosening cycle, reducing the transmission of target changes to longer maturities. Our results trace the information content of federal funds futures to hedging demand.

Keywords: Interest Rates, Futures, Monetay Policy, Expectations

JEL Classification: E43, E44, G12, G13