Accessible Version
Conflicting Signals: Implications of Divergence in Surveys and Market-Based Measures of Policy Expectations, Accessible Data
Figure 1.
Figure 1: Panel A of Figure 1 shows realized outcomes of the federal funds rate target against some different sources of expectations, specifically, OIS forward rates and Blue Chip survey forecasts. Panel A shows that the market-based measure of expectation comes closer to the realized outcomes than the surveys. Panel B shows that more recently in March 2020, surveys again predicted that rates would remain flat, while markets were pricing in additional rate cuts.
Panel A: Implied Federal Funds Rate June 2019. Note: OIS forward rates path is estimated using overnight index swap quotes with a spline approach and a term premium of 0 basis points. The Blue Chip path is the average of respondents' expectations for the federal funds rate in the survey published on June 1, 2019.
Source: Bloomberg LP; Wolters Kluwer Legal and Regulatory Solutions U.S. Blue Chip Financial Forecasts; Board staff calculations.
Panel B: Implied Federal Funds Rate March 2020. Note: OIS forward rates path is estimated using overnight index swap quotes with a spline approach and a term premium of 0 basis points. The Blue Chip path is the average of respondents' expectations for the federal funds rate in the survey published on March 1, 2020.
Source: Bloomberg LP; Wolters Kluwer Legal and Regulatory Solutions U.S. Blue Chip Financial Forecasts; Board staff calculations.
Figure 2. Forward Rates and Blue Chip, 1-year ahead (Shading indicates more than -50 bps gap)
Figure 2 shows a comparison of OIS forward rates and Blue Chip survey forecasts for one year ahead. The blue bars indicate when the gap between the two sets of expectations is more negative than 50 basis points, and makes up about 15% of the sample.
Note: This figure shows the 1-year forward rate (black) and the Blue Chip forecast of the federal funds rate four quarters ahead (red). The blue bars indicate time periods in which the gap between the Blue Chip forecast and forward rate is greater than 50 basis points.
Source: Bloomberg LP; Wolters Kluwer Legal and Regulatory Solutions U.S. Blue Chip Financial Forecasts; Board staff calculations.
Figure 3. Mean Absolute Errors of forecasts of the Fed Funds Rate, 1-yr ahead (30 day rolling window)
Figure 3 graphically coincides with the implications of Table 2. A 30-day rolling window of mean absolute errors of forecasts of the federal funds rate (12-months ahead) is plotted for the past 15 years. The plotted errors are based on forecasts made one year ago. The areas shaded in blue indicate time periods when there was a gap of -50 basis points or more at the time of forecast between the 1-year ahead Blue Chip survey and OIS forward rates. These time periods correspond to the far right column in Table 2. Out of the ten observed episodes, eight of them show the Blue Chip survey (purple line) having the largest mean absolute errors. And in most of these time periods, the OIS forward rate (blue line) has the lowest mean absolute error.
Shaded areas indicate gap of −50 bps or more at the time of forecast between 1−year ahead Blue Chip survey and forward rates. Plotted errors are based on forecasts made 1−year ago.
Source: Bloomberg LP; Wolters Kluwer Legal and Regulatory Solutions U.S. Blue Chip Financial Forecasts; Board staff calculations.
Appendix
The Appendix figure is similar to Figure 1 but now includes the Macro-Finance model and the OIS Shadow Rate term structure model. Panel A shows that the market-based measure of expectation comes closer to the realized outcomes than the surveys. Panel B shows that more recently in March 2020, surveys again predicted that rates would remain flat, while markets were pricing in additional rate cuts.
Panel A: Implied Federal Funds Rate June 2019. Note: OIS forward rates path is estimated using overnight index swap quotes with a spline approach and a term premium of 0 basis points. OIS Shadow Rate path is estimated using a term structure model based on an updated version of Priebsch (2017). The Macro−Finance model path is estimated using regressions of survey−OIS gaps on the covariances between real and nominal variables based on Diercks and Carl (2019). The Blue Chip path is the average of respondents' expectations for the federal funds rate in the survey published on June 1, 2019.
Source: Bloomberg LP; Wolters Kluwer Legal and Regulatory Solutions U.S. Blue Chip Financial Forecasts; Board staff calculations
Panel B: Implied Federal Funds Rate March 2020. Note: OIS forward rates path is estimated using overnight index swap quotes with a spline approach and a term premium of 0 basis points. OIS Shadow R ate path is estimated using a term structure model based on an updated version of Priebsch (2017). The Macro−F inance model path is estimated using regressions of survey−OIS gaps on the covariances between real and nominal variables based on Diercks and Carl (2019). The Blue Chip path is the average of respondents' expectations for the federal funds rate in the survey published on March 1, 2020.
Source: Bloomberg LP; Wolters Kluwer Legal and Regulatory Solutions U.S. Blue Chip Financial Forecasts; Board staff calculations.