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I am looking for a metric for measuring "the expectation of the tightness of monetary policy." I know this is a super vague concept.

My ideal metric is something I can do a "spot price / avg price of past year" to gauge the "expectation" of the tightness of monetary policy. It should ideally also be "forward looking" i.e. reflect market's expectation, rather than what has already happened.

Fed fund rate futures would have been a decent forward-looking metric but Fed can still increase/decrease the balance sheet when Fed fund rate remains constant. The Fed balance sheet itself is not "forward-looking" as it only reflects the asset Fed already acquired.

What other metrics are out there?

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  • $\begingroup$ futures on the ten-year? $\endgroup$ Feb 28 at 21:11
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    $\begingroup$ I think you need an estimate of what neutral is so you can then decide if policy (or expectation of policy) is tight or loose. Probably lots of CB research on this topic, e.g. frbsf.org/economic-research/publications/economic-letter/2005/… $\endgroup$
    – user42108
    Feb 28 at 22:46
  • $\begingroup$ One way to measure credibility is by looking at how closely inflation expectations match the central bank's inflation target (Demertzis et al. 2012). The closer, the more credible. If the [5-Year, 5-Year Forward Inflation Expectation Rate ](fred.stlouisfed.org/series/T5YIFR) is below the target inflation, the markets expect the central bank policies to not be accommodative enough to reach that target. On a side note, purely looking at increase / decrease in the FED balance sheet also tells you little about tightness of MP. $\endgroup$
    – AKdemy
    Mar 1 at 22:06
  • $\begingroup$ Compare current interest rates to the value recommended by the Taylor Rule. Links (1) en.wikipedia.org/wiki/Taylor_rule (2) wsj.com/articles/… $\endgroup$
    – nbbo2
    Mar 3 at 15:30

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