Predicting the Fed Funds Rate

money.jpgJames Hamilton from Econbrowser is currently doing a series of posts over at Econbrowser about predicting the Fed funds rate or more accurately trying to understand what he coins as the lagged effect of monetary policy on the economy. So far he has two posts up based on a newly finished research paper.

(bold parts in quotations are my emphasis) 

The first post sets up the initial framework ...  

I'm just finishing writing a new research paper whose goal is to come up with a better measure and understanding of the lagged effect of monetary policy on the economy. One of my claims is that the public's expectations of what the Fed is going to do next play a key role in that process. In this, the first of several posts based on that paper, I describe some of the properties I've found for fed funds futures prices as predictors of subsequent Fed policy changes.

... And the second post takes up the long term mortgage rate and its anticipatory reaction to Fed policy.  

The overall view supported by this research is that mortgage rates already incorporate an anticipation of what the Fed is going to do next. The only way the Fed can change mortgage rates is by doing something other than what the market previously anticipated. However, if the Fed can credibly signal a change in its near-term intentions, that information will translate immediately into a change in interest rates, and need not wait until the Fed actually acts.

Although the mortgage rate itself appears to respond in an immediate, anticipatory way to Fed policy, the effects of a change in the mortgage rate will then take a considerable amount of time before they affect the economy. I will take up this issue in my next post on this topic.

To be fair the posts are pretty technical (at least for my part) and are as such difficult to approach initially. However, they are worth the trouble I think because they provide a good synopsis on one of the concrete aspects of the transmission mechanism from monetary policy to changes in the economy.