The Fed funds futures rate as a predictor of federal reserve policy

A study examines the Fed funds futures rates' ability to forecast the funds rate, and by extension, short-run movements in monetary policy. Three aspects of their performance are examined: 1. whether the futures rate is an unbiased predictor of the Fed funds rate, 2. whether the forecast errors satisfy the rationality property implied by the efficient markets hypothesis, and 3. the extent to which incorporating information other than the futures rate improves out-of-sample forecasting performance. It is concluded that although Fed funds futures rate exhibits a small premium, the market efficiency incorporates virtually all publicly available quantitative information that can help forecast changes in the funds rate. To a large extent, month-to-month changes in the Federal funds rate are predictable, and the Fed funds futures market is very good at anticipating these changes.