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A New Way to Visualize the Evolution of Monetary Policy Expectations Accessible Data
Figure 1: Navigating the Simplex
The figure shows an approximately equilateral triangle with dashed black sides and solid black circles as corners. The bottom-left corner is labeled “Lower target range.” The bottom-right corner is labeled “Higher target range.” The top corner is labeled “Unchanged target range.” To the left of the triangle is a vertical blue arrow pointing upward and labeled “Prob. of unchanged range.” Below the triangle is a horizontal orange double-headed arrow labeled “Odds on easing vs. tightening.” Three dotted straight orange lines are plotted from the top corner of the triangle to the bottom side. They divide the bottom side into four equally long segments. The lines are labeled, from left to right, “3:1,” “1:1,” and “1:3.” The top corner of the triangle is encircled by a dotted blue line labeled “100%.” Three horizontal blue dotted lines are drawn from the left side of the triangle to the right. The topmost line is located at two thirds the height of the triangle and is labeled “67%.” The middle line is located at one third the height of the triangle and is labeled “33%.” The bottom line coincides with the bottom side of the triangle and is labeled “0%.”
Note: The top corner of the triangle corresponds to a 100 percent probability of an unchanged target range. Along the dotted blue iso-probability lines, the probability of an unchanged range is equal to the indicated percentage. Along the dotted orange iso-odds lines, the odds on a lower vs. higher range are equal to the indicated ratio.
Source: Federal Reserve Board staff.
Figure 2: Federal Funds Futures Option–Implied Policy Rate Probabilities for Year-End 2019
The figure shows an approximately equilateral triangle with dashed black sides and solid black circles as corners. The bottom-left corner is labeled “Lower target range.” The bottom-right corner is labeled “Higher target range.” The top corner is labeled “Unchanged target range.” To the left of the triangle is a vertical arrow pointing upward and labeled “Prob. of unchanged range.” Below the triangle is a horizontal double-headed arrow labeled “Odds on easing vs. tightening.” Within the triangle are five solid blue circles representing data. They are labeled, respectively, “Jan.,” “Mar.,” “May,” “June,” and “July,” and are connected by dotted blue lines. Their overall contour follows a hump shape from right to left. The circle labeled “Jan.” is located just to the right of the center of the triangle. Relative to the circle labeled “Jan.,” the circle labeled “Mar.” is located slightly to the left and moderately up. The circle labeled “May” is located at the same height as the circle labeled “Jan.” but is close to the left side of the triangle. The circle labeled “June” is close to the bottom-left corner of the triangle. The circle labeled “July” is on top of the bottom-left corner of the triangle.
Note: Points within the dashed triangle represent probabilities that the federal funds rate at the end of 2019 will be below, within, or above the range of 2.25 to 2.50 percent. Each blue circle depicts the probabilities as implied by federal funds futures options on the eve of the indicated FOMC meeting.
Source: CME Group Inc.; Federal Reserve Board staff computations.
Figure 3: Survey-Implied Probabilities of Next Policy Action in 2019
The figure shows an approximately equilateral triangle with dashed black sides and solid black circles as corners. The bottom-left corner is labeled “Lower target range.” The bottom-right corner is labeled “Higher target range.” The top corner is labeled “Unchanged target range.” To the left of the triangle is a vertical arrow pointing upward and labeled “Prob. of unchanged range.” Below the triangle is a horizontal double-headed arrow labeled “Odds on easing vs. tightening.” Within the triangle are five solid red circles representing data. They are labeled, respectively, “Jan.,” “Mar.,” “May,” “June,” and “July,” and are connected by dotted red lines. Their overall contour follows a hump shape from right to left. The circle labeled “Jan.” is located moderately inside the triangle from the bottom-right corner. Relative to the circle labeled “Jan.,” the circle labeled “Mar.” is located slightly to the left and up. The circle labeled “May” is somewhat further up and to the left, at about a height of three quarters of the triangle and just to the right of the center horizontally. The circle labeled “June” is lower and to the left, at about the height of the circle labeled “Mar.” and close to the left side of the triangle. The circle labeled “July” is just a small distance from the bottom-left corner of the triangle.
Note: Points within the dashed triangle represent probabilities that the next policy move by the FOMC in 2019 will be a rate cut, a rate hike, or no change in the federal funds target range. Each red circle depicts the average probabilities across respondents from the Federal Reserve Bank of New York’s surveys of primary dealers and market participants conducted before the indicated FOMC meeting.
Source: Federal Reserve Bank of New York; Federal Reserve Board staff computations.
Figure 4: Eurodollar Option–Implied Policy Rate Probabilities for Year-End 2019
The figure shows an approximately equilateral triangle with dashed black sides and solid black circles as corners. The bottom-left corner is labeled “Lower target range.” The bottom-right corner is labeled “Higher target range.” The top corner is labeled “Unchanged target range.” To the left of the triangle is a vertical arrow pointing upward and labeled “Prob. of unchanged range.” Below the triangle is a horizontal double-headed arrow labeled “Odds on easing vs. tightening.” Within the triangle are five solid orange circles representing data. They are labeled, respectively, “Jan.,” “Mar.,” “May,” “June,” and “July,” and are connected by dotted orange lines. Their overall contour follows a hump shape from right to left. The circle labeled “Jan.” is located a little to the right of the center of the triangle. Relative to the circle labeled “Jan.,” the circle labeled “Mar.” is located moderately to the left and up. The circle labeled “May” is located a touch lower than the circle labeled “Mar.” and close to the left side of the triangle. The circle labeled “June” is close to the bottom-left corner of the triangle. The circle labeled “July” is almost on top of the bottom-left corner of the triangle.
Note: Points within the dashed triangle represent probabilities that the federal funds rate at the end of 2019 will be below, within, or above the range of 2.25 to 2.50 percent. Each orange circle depicts the probabilities as implied by Eurodollar futures options (after adjustment as discussed in the main text) on the eve of the indicated FOMC meeting.
Source: CME Group Inc.; Federal Reserve Board staff computations.
Figure 5: Futures Tree–Implied Policy Rate Probabilities for Year-End 2019
The figure shows an approximately equilateral triangle with dashed black sides and solid black circles as corners. The bottom-left corner is labeled “Lower target range.” The bottom-right corner is labeled “Higher target range.” The top corner is labeled “Unchanged target range.” To the left of the triangle is a vertical arrow pointing upward and labeled “Prob. of unchanged range.” Below the triangle is a horizontal double-headed arrow labeled “Odds on easing vs. tightening.” Within the triangle are five solid green circles representing data. They are labeled, respectively, “Jan.,” “Mar.,” “May,” “June,” and “July,” and are connected by dotted green lines. Their overall contour resembles a tall, left-slanted letter “L,” turned upside down. The circle labeled “Jan.” is located close to the right side of the triangle, at about a height of three quarters of the triangle. The circle labeled “Mar.” is at about the same height, but all the way on the left side of the triangle. The circle labeled “May” is also on the left side of the triangle, but at a height of only about a third of the triangle. The circle labeled “June” is close to the bottom-left corner of the triangle. The circle labeled “July” is on top of the bottom-left corner of the triangle.
Note: Points within the dashed triangle represent probabilities that the federal funds rate at the end of 2019 will be below, within, or above the range of 2.25 to 2.50 percent. Each green circle depicts the probabilities as implied by Bloomberg’s binary tree model fit to federal funds futures rates on the eve of the indicated FOMC meeting.
Source: Bloomberg Finance LP.
Figure 6: Option- and Survey-Implied Policy Rate Probabilities for July 2019 Meeting
The figure shows an approximately equilateral triangle with dashed black sides and solid black circles as corners. The bottom-left corner is labeled “0.25 ppt. cut.” The bottom-right corner is labeled “≥ 0.50 ppt. cut.” The top corner is labeled “Unchanged (or higher).” To the left of the triangle is a vertical arrow pointing downward and labeled “Prob. of lower range.” Below the triangle is a horizontal double-headed arrow labeled “Odds on 0.25 vs. ≥ 0.50 ppt. cut.” Plotted within the triangle are, first, three solid blue circles representing option data at FOMC cycle frequency. They are labeled, respectively, “May,” “June,” and “July” and are connected by dotted blue lines. Their overall contour resembles the letter “L” turned left to right. The circle labeled “May” is located on the left side of the triangle, at about a height of four fifth of the triangle. The circle labeled “June” is located almost vertically down relative to the circle labeled “May,” at a height of less than a third of the triangle. The circle labeled July is further below and to the left, only a modest distance from the bottom-left corner of the triangle. Also plotted within the triangle is one solid red circle representing data from July surveys. The circle is located moderately to the right and modestly above the bottom-left corner of the triangle, just below the approximate halfway point between the blue circle labeled “June” and the blue circle labeled “July.” Finally, plotted within the triangle are a set of smaller blue dots representing option data at daily frequency for the June–July intermeeting period. These dots form a “cloud” roughly contained within an oval shape in the bottom third of the triangle, horizontally extending from just to the right of the bottom-left corner of the triangle to about two thirds the distance between the bottom-left and bottom-right corners.
Note: Points within the dashed triangle represent probabilities for the outcome of the July 2019 FOMC meeting in terms of the federal funds target range. Larger blue circles depict the option-implied probabilities on the eve of the indicated FOMC meeting. The smaller blue dots are daily observations for the June-July intermeeting period. The red circle is the average across respondents from the New York Fed's July surveys.
Source: CME Group Inc.; Federal Reserve Bank of New York; Federal Reserve Board staff computations.