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Setting the First Fed Funds Curve Segment from the Current Fixing

Article Quant Q&A · Author: ml4irs
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Summary

The document considers how to build a Fed Funds yield curve with separate interpolation methods: log-linear interpolation of discount factors between FOMC meeting dates on the short end, and a cubic spline for longer maturities. The practical issue is that market data are unavailable for the first meeting-dated overnight index swap, leaving the initial segment without a direct quote.

The proposed workaround is to use the latest published effective Fed Funds fixing as a synthetic forward rate from today to the next FOMC meeting. This rests on the assumption that Fed Funds stay constant between now and that meeting. The response offers a modeling convention rather than empirical evidence or a discussion of uncertainty; the assumption may be unsuitable when market expectations imply a rate change before the meeting.

Key ideas

  • The proposed curve uses log-linear discount-factor interpolation between meeting dates and a cubic spline at longer maturities.
  • The initial meeting-dated swap quote may be unavailable.
  • The suggested synthetic quote uses the latest published Fed Funds fixing as the interim forward rate.
  • This choice assumes the rate remains unchanged until the next FOMC meeting.

Tags

Fixed incomeUS marketsStatistics
Full text
# Constructing the FedFunds Yield Curve with jumps at FOMC meetings


# Constructing the FedFunds Yield Curve with jumps at FOMC meetings












When constructing the FedFunds yield curve I want to define the curve based on two separate interpolation schemes. The first on the short end being LogLinear on the discount factors between FOMC meeting dates whilst the second being a smooth Cubic Spline for longer maturities. Assuming we are using a global optimization to construct the curve we can simply create the short end using FOMC-dated OIS then standard OIS for the long end. My question is regarding the very first FOMC-dated OIS (USSOFED0 Curncy on Bloomberg) which doesn't have available market data. Is it reasonable to create a synthetic quote to produce a forward rate equal to the current EFFR between today and the next FOMC meeting?

## Answer by Lorienzo (score 1)

https://quant.stackexchange.com/a/81483

In theory it is safe to assume FedFunds remain constant in between today and meeting dates, so I would assume the last published FedFunds fixing (FEDL01 Index) to be flat which mean its quote can be used as forward rate between today and the next FOMC meeting.

https://www.federalreserve.gov/econres/notes/feds-notes/indicative-forward-looking-sofr-term-rates-20190419.html

Shown in full with attribution under the source's licence. Licence: CC BY-SA 4.0 (Stack Exchange)

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.