Abstract
What the market thinks is most likely to occur is not necessarily what the market expects to occur. This paper explains why most of the surveys of federal funds rate outlook deviate substantially from the true market expectation, especially as the forecast horizon increases. Surveys often ask participants for their forecast of the 'most likely outcome', which differs from the expected outcome. The latter has to take into account not only the most likely outcome but also those less likely to occur, that is, weighing all the possible outcomes by their probabilities. In a tightening (easing) cycle, the most likely outcome tends to be higher (lower) than the expected outcome, leading to a false impression that the fed will tighten (ease) more than what the market expects. It is only when the chances of rate hikes and rate cuts are roughly balanced that surveys reflect the true market expectation.
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