Federal Reserve Research: Kalshi May Become a More Effective Tool for Measuring Macro Expectations

On February 19, three researchers from the U.S. Federal Reserve concluded that the prediction market Kalshi outperforms existing tools in real-time measurement of macroeconomic expectations and should be incorporated into Federal Reserve decision-making processes. The report titled “Kalshi and the Rise of Macro Markets” was published on February 12, and was authored by Federal Reserve Chief Economist Anthony Diercks, Federal Reserve Research Assistant Jared Dean Katz, and Johns Hopkins University Research Assistant Jonathan Wright. The study compared Kalshi’s data with traditional surveys and market-implied forecasts to examine how market expectations for future economic outcomes change in response to macroeconomic news and policymakers’ statements. “Managing expectations is at the core of modern macroeconomic policy. However, the tools we typically rely on—surveys and financial derivatives—have many limitations,” the researchers stated, adding that Kalshi can “directly and in real-time” capture the market’s “beliefs.” “Kalshi markets provide a high-frequency, continuously updated, information-rich benchmark, which is valuable for researchers and policymakers alike.” “Overall, we believe Kalshi should be used to provide risk-neutral [probability density functions] regarding Federal Open Market Committee decisions at specific meetings,” they argued, noting that the current benchmark “is too far removed from monetary policy rate decisions.” However, the Federal Reserve’s research paper is only “preliminary material distributed to stimulate discussion” and will not influence the central bank’s decisions. The Fed pointed out that one advantage of Kalshi in testing macroeconomic expectations is its “rich intraday dynamics.” The researchers stated, “These probabilities respond quickly and reasonably to significant developments.” They provided an example: after speeches by Federal Reserve Board members Christopher Waller and Michelle Bowman, the implied probability of a rate cut in July rose to 25%, but then decreased again following a stronger-than-expected June employment report. The researchers added, “Kalshi offers the fastest-updating distributions available for many key macroeconomic indicators.”