A New Marked Point Process Model for the Federal Funds Rate Target : Methodology and Forecast Evaluation

Forecasts of the federal funds rate target, the most anticipated indicator of the Fed's monetary policy stance, can be considerably improved when its evolution is modeled as a marked point process in discrete time. This paper motivates an alternative approach that combines Hamilton and Jorda's (2002) autoregressive conditional hazard (ACH) and Russell and Engle's (2005) autoregressive conditional multinomial (ACM) model. The paper also proposes a methodology to evaluate probability function forecasts of this model class. The ACH-ACM qualifies as a useful modeling framework. Goodness of fit and point forecasts are improved. Parsimonious specifications deliver useful probability function forecasts for the target