Biases in Monetary Policy Expectations Extracted From Fed Funds Futures and Surveys

The literature estimates the risk premia in the federal funds futures rates to extract market expectations of monetary policy by assuming that the forecast errors of the market expectations are zero on average, or that survey forecasts are good proxies for market expectations. These assumptions, however, may fail due to an unanticipated downtrend of the federal funds rate over the available sample or strategic behavior of survey respondents. Consequently, the two estimated premia under these assumptions may be biased upward and downward, respectively. We propose an alternative measure of premium, which has been negative on average since 2004.