In a significant development for economic forecasting and monetary policy, researchers at the U.S. Federal Reserve have published a paper endorsing the use of data from prediction market platform Kalshi. The research, titled "Kalshi and the Rise of Macro Markets," was released on February 12 by Federal Reserve Board principal economist Anthony Diercks, research assistant Jared Dean Katz, and Johns Hopkins research associate Jonathan Wright.
The paper argues that Kalshi provides a "high-frequency, continuously updated, distributionally rich benchmark" that is valuable for both researchers and policymakers. It states that traditional tools for managing expectations—such as surveys and financial derivatives—have many drawbacks, while Kalshi can capture the market's "beliefs directly and in real time." The researchers specifically highlighted Kalshi's "rich intraday dynamics," noting that its probability estimates "respond sharply and sensibly to major developments."
For example, the paper cited an instance where the implied probability of a Federal Reserve rate cut in July rose to 25% following remarks from Fed Governors Christopher Waller and Michelle Bowman, before falling after a stronger-than-expected June employment report. "Kalshi provides the fastest-updating distributions currently available for many key macroeconomic indicators," the researchers concluded.
The Fed researchers propose that Kalshi data should be used to generate risk-neutral probability density functions for Federal Open Market Committee (FOMC) interest rate decisions, arguing that current benchmarks are "too far removed from the monetary policy interest rate decision." Kalshi markets allow trading on outcomes tied to key economic indicators like the Consumer Price Index (CPI) inflation, payroll data, GDP growth, and gas prices.
It is important to note that Federal Reserve research papers are considered "preliminary materials circulated to stimulate discussion" and do not directly impact the central bank's immediate policy decisions. However, this public endorsement from Fed staff represents a pivotal shift in regulatory and institutional acceptance of prediction markets. Kalshi received regulatory approval from the Commodity Futures Trading Commission (CFTC) in 2022 to offer contracts on economic events, navigating post-Dodd-Frank Act restrictions.
The development has been welcomed by economists. Dr. Susan Athey of Stanford University noted that prediction markets "aggregate dispersed information efficiently," while Dr. Justin Wolfers from the University of Michigan observed they "often forecast more accurately than professional forecasters." The move signals a broader potential adoption of alternative, crowd-sourced data by government institutions, which could influence other central banks like the European Central Bank and the Bank of England.
