Market-Based Monetary Policy Uncertainty

This data series is part of the Center for Monetary Research.

Market-Based Monetary Uncertainty provides daily indicators measuring the uncertainty about future short-term interest rates based on financial market prices on any given day. These measures are calculated from prices of money market derivatives using the methodology in Bauer, Lakdawala, and Mueller (2022).

The uncertainty is measured as the square root of the “model-free variance” obtained from futures and options prices. Bauer et al. (2022) used Eurodollar futures and options, and the updated series uses these same derivatives until September 2022. Because of the phasing-out of LIBOR and Eurodollar derivatives, the calculation uses SOFR (Secured Overnight Financing Rate) futures and options starting in October 2022, at which point liquidity of SOFR options became comparable to that of Eurodollar options.

Uncertainty is first estimated for each quarterly derivative contract expiration separately, and then conditional variances are linearly interpolated to constant maturities of 6, 12, 18, and 24 months. For additional details, see Bauer, Lakdawala, and Mueller (2022) and the paper’s online appendix.

The daily measures can be used to study changes in uncertainty due to macroeconomic data releases, monetary policy announcements, or other news. Given the long available history, going back to 1990, the data can also help understand broader trends in uncertainty about future monetary policy over the business cycle or over the long run.

Since the Federal Reserve controls the level of short-term interest rates, the measure ultimately captures uncertainty about monetary policy. At the same time, monetary policy reacts to macroeconomic conditions, so an alternative interpretation is that measured uncertainty is due to both macroeconomic uncertainty, for example, about future inflation and unemployment, and policy uncertainty, for example, about Fed reactions to certain economic changes. Bauer et al. (2022) investigated changes in uncertainty around monetary policy announcements to isolate and study changes in policy uncertainty.

Reference

Bauer, Michael D., Aeimit Lakdawala, and Philippe Mueller. 2022. “Market-Based Monetary Policy Uncertainty.” Economic Journal 132(644, May).

Download Data

Daily Market-Based Monetary Policy Uncertainty (Excel file, 555 kb)