Is Intervention a Signal of Future Monetary Policy? Evidence from the Federal Funds Futures Market

Posted: 3 Sep 1998

See all articles by Rasmus Fatum

Rasmus Fatum

University of Alberta - Department of Marketing, Business Economics & Law

Michael M. Hutchison

University of California, Santa Cruz - Department of Economics

Abstract

Sterilized foreign exchange market intervention may affect the exchange rate if it signals future monetary policy actions. Signaling will be effective if the central bank backs up intervention with predictable changes in the stance of monetary policy and, in turn, affects current expectations. We investigate whether daily intervention operations in the United States are related to changes in expectations over the stance of future monetary policy, where expectations are proxied by Federal funds futures rates. This relatively new futures market instrument has proved to be an efficient and unbiased predictor of the future spot Federal funds rate. Estimates obtained from a GARCH time-series model over the 1989-93 period using daily data do not support the signaling hypothesis: dollar-support intervention is not related to a rise in expected future short-term interest rates (monetary tightening). However, intervention appears to significantly increase the conditional variance of Federal funds futures rates, suggesting that it adds considerable noise to the market and possibly increasing the degree of uncertainty over the future course of monetary policy.

JEL Classification: E52, E58, F31, G15

Suggested Citation

Fatum, Rasmus and Hutchison, Michael M., Is Intervention a Signal of Future Monetary Policy? Evidence from the Federal Funds Futures Market. Journal of Money, Credit, and Banking, Vol. 31, No. 1, February 1999, Available at SSRN: https://ssrn.com/abstract=122471

Rasmus Fatum

University of Alberta - Department of Marketing, Business Economics & Law ( email )

Edmonton, Alberta T6G 2R6
Canada
780-492-3951 (Phone)
780-492-3325 (Fax)

HOME PAGE: http://www.bus.ualberta.ca/rfatum

Michael M. Hutchison (Contact Author)

University of California, Santa Cruz - Department of Economics ( email )

Social Sciences I
Santa Cruz, CA 95064
United States
831-459-2600 (Phone)
831-459-5900 (Fax)

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