Expectations of Fed policy actions are not directly observable, of course, but Fed funds futures prices are a natural, market-based proxy for those expectations. The market was established in 1989 at the Chicago Board of Trade, and contracts based on one- through five-month Fed funds are currently traded, along with a “spot month” contract based on the current month’s funds rate. Krueger and Kuttner (1996) found that funds rate forecasts based on the futures price are “efficient,” in that the forecast errors are not significantly correlated with other variables known when the contract was priced
