What Fed Funds Futures Tell Us About Monetary Policy Uncertainty
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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 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.