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Using Rate Futures and OIS to Read Fed Rate Expectations

Article Quant Q&A · Author: VanillaCall
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Summary

The document asks how spot rates and forward rates respond when markets anticipate a Federal Reserve rate cut. The replies point to federal funds futures as the most liquid instrument relevant to the question, and also mention OIS rates and three-month SOFR futures as instruments that reflect expected policy rates.

To estimate the expected path, one suggested approach is to interpolate one-day forward rates as piecewise-flat segments, with curve nodes at FOMC meeting dates. The estimate may also need adjustments for rate jumps around month-, quarter-, and year-end. The discussion offers a practical starting point, but does not provide data or establish a universal order in which spot and forward rates move; its framing distinguishes futures moves tied to market expectations from spot moves tied to realized policy actions.

Key ideas

  • Federal funds futures are identified as a liquid instrument for gauging expected policy moves.
  • OIS rates and three-month SOFR futures also embed expectations about rate changes.
  • A piecewise-flat curve of one-day forward rates can use FOMC dates as interpolation nodes.
  • Month-, quarter-, and year-end effects may require adjustments when extracting rate expectations.

Tags

Fixed incomeFuturesUS marketsStatistics
Full text
# Possible first rate cut by Fed - spot vs forwards


# Possible first rate cut by Fed - spot vs forwards












This may be my first rate cut since I joined the industry. I've only see rate hikes and I've been reading through literature from back in 2007 when the Fed last cut rates to get a general feel for how markets move but need to get a sense of how spots/forwards behave.

If the market prices the Fed cutting rates either from weak economic data (inflation, economic growth, etc..), which moves first? Spot or forwards. I know they're tied together but it seems like forwards reflect what the market expects and the spot would adjust accordingly. However, there are different forward dates so do they collectively all influence how the spot prices move?

## Answer by dm63 (score 1)

https://quant.stackexchange.com/a/45389

Are you talking about Fed Funds futures? That is the most liquid instrument relevant to your question. What happens is that the futures move according to what the market expects the Fed to do, then the spot moves according to what they actually do.

## Answer by CatFather (score 0)

https://quant.stackexchange.com/a/45392

as @dm63 noted, look at fed funds futures. also look at ois swap rates and sofr 3m futures. they should all embed market expectation of rate hikes/cuts. one way to extract market expectation is to use piecewise flat interpolation of 1d forward rates with nodes on fomc meeting dates and also adjust your forward for month end/quarter end/year end jumps.

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