On the Forecasting Content of the Implied Forward Rate Available to Purchase

Today's maturity pattern of interest rates contains an implicit market forecast of future short‐term rates. However, it is well known that these implied rates generally fail to explain actual movements in short‐term rates. From two empirical propositions about movements of yield curves it follows that half of the time short‐term rates will move in the opposite direction from that forecasted implicitly by the market. Data comparing implied forward short‐term yields on US Treasury bills with actual yield movements fail to reject the hypothesis that the market's forecast will err in di‐rection half of the time. It follows that the direction of movement in short‐term rates is independent of the shape of the yield curve. Because implied forward rates lack forecasting content it would not be rational for investors to use them as market forecasts.