# 11-093/4 (2011-07-15)

Sjoerd van den Hauwe, Erasmus University Rotterdam; Dick van Dijk, Erasmus University Rotterdam; Richard Paap, Erasmus University Rotterdam
Federal funds target rate, real-time forecasting, dynamic ordered probit, variable selection, Bayesian analysis, importance sampling
JEL codes:
E52, E58, C25, C11, C53

This paper examines which macroeconomic and financial variables are most informative for the federal funds target rate decisions made by the Federal Open Market Committee (FOMC) from a forecasting perspective. The analysis is conducted for the FOMC decision during the period January 1990 - June 2008, using dynamic ordered probit models with a Bayesian endogenous variable selection methodology and real-time data for a set of 33 candidate predictor variables. We find that indicators of economic activity and forward-looking term structure variables as well as survey measures have most predictive ability. For the full sample period, in-sample probability forecasts achieve a hitrate of 90 percent. Based on out-of-sample forecasts for the period January 2001 - June 2008, 82 percent of the FOMC decisions are predicted correctly.

This discussion paper resulted in an article in the Journal of Macroeconomics (2013). Volume 37, pages 19-40.