- Fed Funds Probability
Fed Funds Probability is the probability of
Federal Reserve actions at upcomingFederal Open Market Committee (FOMC) meetings. At every meeting of the FOMC, its members decide whether to increase, decrease, or leave theFederal funds rate unchanged after reviewing the economic conditions in the United States. Financial markets constantly predict the Fed's move by trading Fed Fundsfutures contract s on theChicago Board of Trade (CBOT).As such, the prices of the CBOT Fed Funds contract reflect expectations of Fed actions and can be used to calculate the implied probability of action at each FOMC meeting. This phenomenon was perceived by Gerald Lucas and Timothy Quek,
fixed-income strategists atMerrill Lynch who published the article "Front-End Pricing Report Guide" in the Merrill Lynch Global Fixed Income Research report of Nov. 10, 1995. They created a financial model to calculate the probabilities at FOMC meetings and published their Fed Funds Probability reports for their clients. Ever since, the financial markets have tracked this probability, which is frequently reported by financial media such asCNBC andMarketWatch .The Fed Funds Probability report has a significant role in financial markets.
Market maker s andtrader s use this information to trade financial assets. Federal Reserve decision-makers use the information to assess market expectations. By using the report (and other indexes) markets can constantly adjust to changes in the economic outlook, reducing the chances of a shock to the financial system.External links
* [http://www.clevelandfed.org/research/policy/fedfunds/Index.cfm Federal Reserve Bank of Cleveland: Fed Fund Rate Predictions]
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