Predicting the Direction of the Fed's Target Rate
Version of Record online: 14 NOV 2010
Copyright © 2010 John Wiley & Sons, Ltd.
Journal of Forecasting
Volume 31, Issue 1, pages 47–67, January 2012
How to Cite
Kauppi, H. (2012), Predicting the Direction of the Fed's Target Rate. J. Forecast., 31: 47–67. doi: 10.1002/for.1201
- Issue online: 25 DEC 2011
- Version of Record online: 14 NOV 2010
- federal funds rate target;
- dynamic multinomial logit model
Predicting the direction of central banks' target interest rates is important for various market participants. This paper advances procedures for predicting the direction of the federal funds target rate using a dynamic extension of the multinomial logit model. I find that the 6-month Treasury bill spread relative to the federal funds rate, the unemployment rate and the real GDP growth rate have superior predictive content for the direction of the target a week to several months ahead. When these variables are employed, lagged target changes do not provide additional predictive power. This suggests that the apparent positive serial dependence of the target changes is due to the Fed's systematic response to autocorrelated macroeconomic variables. Copyright © 2010 John Wiley & Sons, Ltd.