Model Probability Distribution Of Alternative Fed Funds Rates

Using the links to the model below, you can estimate the latest implied probabilities for alternative federal funds target rate choices for upcoming FOMC meetings. The model uses settlement prices of options on the 30-day federal funds futures contracts (FFP and FFC), not prices from the binary options (BUSP and BUSC).

Model

(The model will pop up in its own window and you may need to install the latest version of Java.)

• June FOMC Meeting

How to Use the Model

1. To select a set of alternative fed funds rate targets:

Click on the fed funds target rate buttons to toggle them on and off. Doing so changes which fed funds target rates are included in the estimates. You must select two or more contiguous target rates. If you select a noncontiguous set of target rates, then all of the target rate possibilities are turned on.

2. To include a term premium constraint:

Click the term premium check box and use the slider to select the desired term premium. If you select a term premium of, say, two basis points, then the probability-weighted sum of the alternative target rates plus a two-basis-point premium for every month until the option contract's expiration must equal the settlement futures price. Note that selecting a term premium of zero basis points corresponds to imposing a futures price restriction and that the term premium models presented in the excel sheet use a one basis point term premium.

3. To include the constraint that probabilities must be nonnegative:

Click on the appropriate check box.

Technical Notes

The models use a Java applet. You may have to install the latest version of Java in order for the applets to work. It is at http://java.com/en/download/windows_xpi.jsp.

Models are available for FOMC meetings where implied probabilities can be estimated with the single meeting estimation technique. An implication of this is that you can always estimate the probability density function (pdf) covering a meeting’s outcomes if the month following the meeting month does not have any scheduled FOMC meetings. For example, the pdf for the June 2008 meeting can be estimated because there is no scheduled meeting until the beginning of August. Under the assumption that there are no intermeeting changes, May options and futures prices only embed the probabilities of alternative June FOMC meeting outcomes.

Data Downloads

• Data in Excel (what's this?)