Federal researchers are embracing prediction markets as policy-relevant tools just as state regulators move to curtail them.
The authors found that the models closely match, and even exceed, forecasts from traditional benchmarks while providing continuously updated probability distributions around key data releases and policy meetings.
Their findings suggest prediction markets can serve as a “valuable complement to existing forecast tools in both research and policy settings,” the authors wrote.
By offering “transparent, continuously updated, and economically interpretable measures of expectations” with competitive forecast performance, prediction markets could “open new avenues” for studying monetary policy transmission, market sentiment, and macroeconomic uncertainty, the authors said.
The Fed's study arrives as state regulators intensify scrutiny of prediction markets.
A request to pause Nevada’s enforcement action against a federally regulated prediction market was denied, allowing the state to move forward while the broader legal dispute continues. The decision complicates and adds weight to an ongoing debate over whether these markets fall under federal commodities law or state gambling regimes.
While the ruling allows Nevada to proceed with its enforcement case, it is only an interim decision that does not address the merits of the underlying appeal, a person familiar with the matter told Decrypt.
Supreme Court review, if pursued, would come only after the Ninth Circuit resolves the full appeal, not at this administrative stay stage, Decrypt was told.
But the sector has faced mounting regulatory pressure.
Industry observers say the paper reveals tensions between prediction markets’ potential and ongoing regulatory uncertainty.
“Regulatory clarity is helpful, but certainty is never permanent; political and legal environments are always shifting,” Tom Chalmers, CEO of prediction market protocol functionSPACE, told Decrypt. “What matters for prediction markets as forecasting tools is whether participants can operate with enough stability to provide deep, continuous liquidity.”
The use for gambling is just one of many use cases, Chalmers noted.
“These markets only function as real-time gauges of inflation or rate expectations if a broad set of informed actors can participate without fearing abrupt shutdowns or jurisdictional conflict,” he said.
If prediction markets maintain predictive accuracy, Chalmers argues they could offer central banks a real-time gauge of inflation and rate expectations.
Chalmers said “there is room” for prediction markets to become “even better forecasting engines,” including through the development of mathematical standards designed to represent full probability distributions, such as variance and skewness, which could provide “vital signals” for policymakers.
