DP4587 Federal Funds Rate Prediction

Author(s): Lucio Sarno , Daniel L Thornton , Giorgio Valente

Publication Date: September 2004

Keyword(s): E47 , federal fund rate , forecasting , term structure , nonlinearity

JEL(s): E43

Programme Areas: International Macroeconomics

Link to this Page: www.cepr.org/pubs/dps/DP4587.asp

We examine the forecasting performance of a range of time-series models of the daily US effective federal funds (FF) rate recently proposed in the literature. We find that: (i) most of the models and predictor variables considered produce satisfactory one-day-ahead forecasts of the FF rate; (ii) the best forecasting model is a simple univariate model where the future FF rate is forecast using the current difference between the FF rate and its target; (iii) combining the forecasts from various models generally yields modest improvements on the best performing model. These results have a natural interpretation and clear policy implications.