Fed Researchers Suggest Kalshi Prediction Markets Could Guide Monetary Policy

The Federal Reserve has long relied on a suite of lagging and coincident indicators to steer the U.S. economy, ranging from non-farm payrolls to consumer price index prints. However, a new research paper from Federal Reserve economists suggests that the central bank might find its most potent forward-looking tool in the prediction markets of Kalshi. By analyzing the rich intraday dynamics of event contracts, researchers argue that these markets offer a high-fidelity, real-time mirror of public and investor expectations that traditional instruments often struggle to capture with the same level of granularity.

The core of the researchers' argument rests on the speed and specificity of Kalshi’s data. Unlike the Treasury market, which can be influenced by a myriad of factors including global flight-to-safety flows or technical liquidity constraints, a Kalshi contract on a specific Fed rate hike is a pure play on that single outcome. When the Federal Open Market Committee (FOMC) releases a statement or Chair Jerome Powell begins a press conference, the price movements on Kalshi provide an immediate, quantified shift in probability. This allows policy analysts to observe exactly how the market is digesting information second-by-second, rather than waiting for the next day's closing prices or the settlement of futures contracts.

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However, a new research paper from Federal Reserve economists suggests that the central bank might find its most potent forward-looking tool in the prediction markets of Kalshi.

This institutional interest comes at a pivotal moment for Kalshi and the broader prediction market industry. For years, these platforms operated in a regulatory gray area or were restricted to small-scale academic experiments. Kalshi’s emergence as a CFTC-regulated exchange changed the calculus, providing a level of oversight and data integrity that institutional players—including the Fed—require. The researchers’ focus on Kalshi, rather than unregulated offshore competitors, underscores the importance of a regulated environment in making prediction market data policy-grade.

Comparing Kalshi’s data to traditional tools like the CME FedWatch Tool reveals significant advantages in terms of responsiveness. While FedWatch derives probabilities from 30-Day Federal Funds Futures, these futures are often thinly traded outside of major sessions and can be skewed by hedging activities unrelated to pure policy expectations. Kalshi’s event contracts, by contrast, are designed for the express purpose of price discovery around specific binary or categorical outcomes. The intraday dynamics mentioned by the researchers suggest that during high-volatility events, Kalshi may actually lead traditional markets in discovering the new normal for interest rate expectations.

However, the integration of such data into the Fed’s decision-making process is not without its critics. Skeptics point to the potential for reflexivity—a feedback loop where the market predicts what the Fed will do, and the Fed, seeing the market's expectation, feels compelled to follow suit to avoid a market tantrum. There are also concerns regarding liquidity and the potential for large actors to manipulate thin markets to send false signals to policymakers. The Fed researchers acknowledge the need for robust analysis but seem to suggest that the benefits of real-time sentiment tracking outweigh these structural risks.

Looking forward, the validation of Kalshi’s data by Fed researchers could signal a broader shift in how economic policy is formulated. We may be entering an era of nowcasting, where the delay between an economic shock and the policy response is virtually eliminated. For investors, this means that prediction markets are no longer just a niche venue for political betting; they are becoming essential infrastructure for price discovery in the global financial system. As the Fed continues to explore these tools, expect other central banks and regulatory bodies to follow suit, further legitimizing the role of the wisdom of the crowd in high-stakes economic governance.