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Vol. 78, No. 4
Posted 1996-07-01

Monetary Policy and Financial Market Expectations: What Did They Know and When Did They Know It?

by Michael R. Pakko and David C. Wheelock

Interest rates sometimes seem to respond to Federal Reserve policy actions in unexpected ways—for example, falling when the Fed “tightens” monetary policy or rising when the Fed “eases” policy. In this article, the authors attempt to demystify such responses. They show how trading in the federal funds futures market reveals public expectations of Federal Reserve actions, and how our knowledge of these expectations can help us interpret the behavior of interest rates.

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