Assessing Monetary Policy Effects Using Daily Fed Funds Futures Contracts

39 Pages Posted: 5 Nov 2007 Last revised: 31 Jul 2022

See all articles by James D. Hamilton

James D. Hamilton

University of California at San Diego; National Bureau of Economic Research (NBER)

Date Written: November 2007

Abstract

This paper develops a generalization of the formulas proposed by Kuttner (2001) and others for purposes of measuring the effects of a change in the fed funds target on Treasury yields of different maturities. The generalization avoids the need to condition on the date of the target change and allows for deviations of the effective fed funds rate from the target as well as gradual learning by market participants about the target. The paper shows that parameters estimated solely on the basis of the behavior of the fed funds and fed funds futures can account for the broad calendar regularities in the relation between fed funds futures and Treasury yields of different maturities. Although the methods are new, the conclusion is quite similar to that reported by earlier researchers-- changes in the fed funds target seem to be associated with quite large changes in Treasury yields, even for maturities up to ten years.

Suggested Citation

Hamilton, James D., Assessing Monetary Policy Effects Using Daily Fed Funds Futures Contracts (November 2007). NBER Working Paper No. w13569, Available at SSRN: https://ssrn.com/abstract=1027188

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