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November/December 2006, 
Vol. 88, No. 6
Posted 2006-11-01

What Are the Odds? Option-Based Forecasts of FOMC Target Changes

by William R. Emmons, Aeimit K. Lakdawala, and Christopher J. Neely

This article uses probability forecasts derived from options to assess evolving market uncertainty about Federal Reserve monetary policy actions in a variety of recent events and episodes. Options on federal funds futures contracts reveal a complete probability density function over possible Federal Reserve target rates, thus augmenting the expectations provided by federal funds futures contracts. Option-based forecasts are most useful when more than two federal funds target outcomes are plausible at an upcoming policy meeting.