Front-End Term Premiums in Federal Funds Futures Rates and Implied Probabilities of Future Rate Hikes, Accessible Data
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Figure 1: Fed Funds Rate Step Path on September 12, 2016
This Figure plots the fed funds rate step path on September 12, 2016 for two assumptions on the term premium adjustments. The black line plots the step path with no term premium adjustments, while the red dashed line plots the step path with term premium adjustments of -2 basis points per month. For both lines, there are discrete increases in the fed funds rate at the time of each FOMC meeting reflecting a possibility of a rate hike. The paths are plotted up to the December 2016 FOMC meeting date.
Figure 2: Fed Funds Rate Expectations Two Years Ahead
This Figure plots the fed funds rate expectations 2-years ahead. The blue line plots expectations computed from the PD survey, and the red line plots expectations computed from the OIS. The time series span FOMC meeting dates since January 2015 up to September 2016. Both lines are moderately declining throughout the sample period in a similar fashion, and the blue line is consistently above the red line with some variation in the gap between the two series.
Note: "OIS" is the two-years-ahead forward rate based on OIS quotes, and "PD survey" is the average of the modal forecasts from the Survey of Primary Dealers, linearly interpolated for the two-year horizon.
Figure 3: Binomial Tree Model
This Figure is a schematic description of the binomial tree model of the fed funds rate used in the analysis. Starting from the initial node, there are two possible moves (stay as is, or move up) for each node, and each move is assigned a distinct probability. Each move corresponds to a move of the fed funds rate between FOMC meetings. In the end, there are two nodes in the next FOMC meeting, three nodes in the second next meeting, and four nodes in the third next FOMC meeting.
Figure 4: Illustration of Nonlinear Term Premium at the Front End
This Figure is a schematic description of the nonlinearity of term premiums at the front-end. The x-axis is maturity and the y-axis is the term premium. The solid blue line is an intuitive example of term premiums that are nonlinear with respect to maturity; the term premium is zero at zero maturity and decreases faster as the maturity increases. The dashed blue line is an intuitive example of term premiums that are linear with respect to maturity; the term premium is zero at zero maturity and decreases with a constant slope as the maturity increases.