17 Dec 2015

Quick Project for Those Versed in Financial Markets

Market Monetarism 7 Comments

OK kids, here’s what I want. To sweeten the pot, the first person to post in the comments has the right to ask me for a $20 PayPal payment. And if someone’s comment is held up by the blog awaiting moderation, we’re going with the first person whose comment is visible. So keep that in mind…

I want to know what “the market” expected the federal funds rate to be on December 1, 2008. Please use some standard technique such as looking at the price of fed funds future market contracts. But I want to know what the market forecast of this particular item would be, on the following dates (ideally I’d like the implied level at closing for each of these dates, but if all you have is a daily average rate, that’s OK):

* June 24, 2008
* June 25, 2008
* June 26, 2008

* August 4, 2008
*August 5, 2008
* August 6, 2008

* September 15, 2008
* September 16, 2008
* September 17, 2008

The person to get the $20 offer is the one to first post the numbers for the above, but also we need the ability to verify your work. (I’m saying that in case the links make the blog hold up your comment in moderation. If that happens, post the numbers alone to get your money, and then later post the comment with links to verify and I can Accept that once I’m back in front of a computer.)

7 Responses to “Quick Project for Those Versed in Financial Markets”

  1. Kevin Erdmann says:

    In case nobody has access to that data, maybe 3 month and 6 month treasury yields can be used to estimate forward rates:


  2. DMS says:

    I think what you are asking for is the Fed Funds Futures data for the 12/31/08 contract as of those dates. That is this:


    I’ve pulled the data for you:

    6/24 – 2.52%
    6/25 – 2.48%
    6/26 – 2.38%

    8/4 – 2.195%
    8/5 – 2.17%
    8/6 – 2.15%

    9/15 – 1.71%
    9/16 – 1.81%
    9/17 – 1.62%

    I pulled this quickly, but it should be correct. If so, please keep your $20, or donate to Mises.com if you feel so inclined.

    • DMS says:

      Sorry, I re-read your post, and you had asked about expectations for December 1st, not 31st. It doesn’t change anything materially, but that would be asking about the November 30th contract on the dates you specified. Here is the proper link and the revised figures:

      6/24 – 2.465%
      6/25 – 2.42%
      6/26 – 2.34%

      8/4 – 2.16%
      8/5 – 2.135%
      8/6 – 2.12%

      9/15 – 1.78%
      9/16 – 1.845%
      9/17 – 1.65%


      In terms of the substance of where I think you’re going, the above clearly shows the markets expecting Fed loosening over time. However, if you go back a bit earlier, the market expected Fed tightening back in early June. And recall that the ECB actually did tighten, raising rates 25 bps on July 3rd, 2008, only to backtrack rapidly at the end of the year when all hell was breaking loose. So before relying too much on the Fed Funds Futures data, you might look at some of the news articles at the time. Were I making the MM argument, I would say that in early June the global markets believed central banks were leaning towards tightening rather than loosening (amidst much confusion over slow growth, but threatening inflation), and this was reflected directly in the ECB’s subsequent actions and in Trichet’s commentary (the July move was widely anticipated for some time). I would argue that the Fed was on the same track, but then events overtook their plans in the other direction.

    • Bob Murphy says:

      Thanks DMS this looks great!

    • Bob Murphy says:

      DMS can you explain how you’re going from the futures prices to the implied level of the fed funds rate on those dates? And also, are your figures the closing values on those dates, or something else? thanks

      • DMS says:

        I used settlement prices, but it doesn’t really matter – there isn’t much daily movement, so open, high, low or average are all about the same. It is quoted at 100 minus the expected FF rate in the month of delivery. So the 9/17 settlement price of 98.35 is an expected 1.65% FF rate for the month of November. I’m not a futures trader so the mechanics of the contracts are beyond my understanding, but I do know that lots of forecasters use these to calibrate market expectations for the Fed Funds rate and interest rates more generally.

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