Estimating Changes in Market Expectations of Inflation in Response to Federal Reserve Rate Cuts in January 2008

North American Journal of Finance and Banking Research, Vol. 2, No. 2, 2008

12 Pages Posted: 19 Jan 2010

See all articles by Carolin D. Schellhorn

Carolin D. Schellhorn

Saint Joseph's University - Department of Finance

Rajneesh Sharma

St. Joseph's University - Department of Finance

Date Written: October 28, 2008

Abstract

The calculation of forward rates implied in Treasury spot rates is well known. A simple extension that uses yields on TIPS and similar-maturity conventional Treasury securities to estimate changes in the market’s expectation of inflation is less well known. One interesting opportunity to apply this method arose in January 2008 around the time of two substantial federal funds target rate cuts by the Federal Reserve. Near-term and longer-term inflation expectations appear to have responded differently to the first and second interest rate cuts, which were only ten days apart. After reporting our results, we discuss potential limitations of this method.

Keywords: Treasury securities, TIPS, inflation expectations

JEL Classification: E4, E5, E31

Suggested Citation

Schellhorn, Carolin D. and Sharma, Rajneesh, Estimating Changes in Market Expectations of Inflation in Response to Federal Reserve Rate Cuts in January 2008 (October 28, 2008). North American Journal of Finance and Banking Research, Vol. 2, No. 2, 2008, Available at SSRN: https://ssrn.com/abstract=1536689

Carolin D. Schellhorn (Contact Author)

Saint Joseph's University - Department of Finance ( email )

Philadelphia, PA 19131
United States
610-660-1657 (Phone)
610-660-1986 (Fax)

Rajneesh Sharma

St. Joseph's University - Department of Finance ( email )

Philadelphia, PA 19131
United States

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