Explaining and Forecasting the US Federal

This book has been written as a practical guide for finance markets professionals to explain US monetary policy and to make forecasts of future interest rate levels. Aimed at market players, familiar with US policy instruments, Explaining and Forecasting the US Federal Funds Rate will provide a means of making independent interest rate forecasts as well as explaining current rate levels.

Matthew Clements is a Freelance Economist.

List of Figures

ix

List of Tables

xi

Acronyms

xiii

Introduction

1

(4)

1 Monetary Policy Models

5

(22)

Introduction

5

(3)

The Taylor rule

8

(6)

Explaining deviations In the Taylor rule from the actual FFR

14

(4)

Variations on the Taylor rule using other data

18

(2)

Discretion versus rules based monetary policy

20

(2)

Data used in monetary policy models

22

(5)

2 Monetary Policy at the US Federal Reserve

27

(20)

Introduction

27

(1)

The history of Fed policy since 1970

28

(13)

Fed targets and policy instruments

41

(6)

3 The Monetary Policy Model (MPM)

47

(22)

Introduction

47

(1)

Applications of the MPM

47

(2)

The MPM equation

49

(6)

Explaining deviations in the MPM from the actual FFR

55

(5)

Using the MPM

60

(3)

Modifying the MPM during 'crisis' periods

63

(2)

Using the modified MPM

65

(2)

Assessing the accuracy of the MPM in describing the FFR

67

(2)

4 Making FFR Forecasts Using the MPM

69

(6)

Introduction

69

(1)

Using CBO economic projections with the MPM to estimate the future FFR

70

(1)

Making one year ahead FFR forecasts

71

(1)

Making two year ahead FFR forecasts

72

(1)

Making two year ahead average FFR forecasts

72

(1)

Making three to five year ahead forecasts

73

(2)

5 Comparing MPM Results with the Eurodollar Futures Market

75

(8)

Introduction

75

(1)

One year ahead futures prices

76

(1)

Two year ahead futures prices

77

(1)

Two year ahead average futures prices

78

(3)

Comparing the two year ahead average forecasting errors of the MPM and eurodollar futures strips

81

(2)

APPENDICES

83

(52)

Appendix 1: Historic economic data (1980-2002)

85

(8)

Appendix 2: Eurodollar futures: historical data (1987-2002)

93

(10)

Appendix 3: The Federal Funds Rate (1980-2002)

103

(24)

Appendix 4: A comparison of different US inflation measures (1970-2002)

127

(2)

Appendix 5: The MPM and FFR (1980-2002)

129

(6)

Bibliography

135

(4)

General Notes

139

(4)

Index

143

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Explaining and Forecasting the US Federal Funds Rate A Monetary Policy Model for the US

Summary

Author Biography

Table of Contents

Supplemental Materials