CME FedWatch Tool: How to Read Fed Rate Probabilities

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The CME FedWatch Tool turns the prices of 30-day fed funds futures into probabilities for what the Federal Open Market Committee (FOMC) will do with the federal funds target range at each upcoming meeting. A reading such as “70% hold, 30% cut 25 basis points” is not a forecast from CME Group or the Fed. It is the outcome mix that makes current futures prices add up, given a set of simplifying assumptions. To read FedWatch well, you need to know what the futures price represents, how the tool converts it into odds, and where that conversion stops being reliable.

What the CME FedWatch Tool measures

The federal funds rate is the overnight rate at which banks lend reserves to each other. The FOMC does not set one exact number. It sets a target range, 25 basis points wide, and steers the effective federal funds rate (EFFR), published daily by the Federal Reserve Bank of New York, to trade inside it. Changes to the target range pass through to bank lending rates, deposit yields, Treasury yields and other borrowing costs, which is why markets care so much about the outcome of each of the FOMC’s eight scheduled meetings per year.

FedWatch answers one narrow question: given where fed funds futures trade right now, what probability does the market attach to each possible target range after a given meeting? Investors, analysts and economists use it to compare their own views with market pricing and to see how much of a decision is already priced in before it happens.

From futures price to implied rate

Thirty-day fed funds futures trade on the Chicago Mercantile Exchange. Each contract settles to the average of the daily EFFR over its calendar month. The quote is not a dollar price. It is an index:

Futures price = 100 − expected average fed funds rate for the month

A price of 96.00 implies an expected average rate of 4.00%. A price of 99.75 implies 0.25%. Because of the subtraction, price and implied rate move in opposite directions:

• If traders come to expect a hike, the expected rate rises and the futures price falls.
• If traders come to expect a cut, the expected rate falls and the futures price rises.

So when headlines say fed funds futures are “rallying” ahead of a meeting, the market is pricing a lower rate path.

How the probability is calculated

The futures contract gives an expected monthly average. An FOMC decision, however, usually takes effect partway through the month. FedWatch separates the days before the decision from the days after it, then solves for the rate the market expects once the change is in place.

The logic works in four steps:

1. Take the implied average rate for the meeting month from the futures price.
2. Treat that average as a day-weighted blend of the rate before the decision and the rate after it.
3. Solve for the post-meeting rate.
4. Compare the expected change with the 25 basis point step size and split the probability between the two nearest outcomes.

Worked example (hypothetical)

All figures below are invented and do not describe any actual meeting or market level.

• Current target range: 3.00% to 3.25%, with the EFFR assumed at 3.10%
• Meeting month: 30 days, with the old rate assumed to apply for 17 days and the new rate for 13 days
• Futures price for that month: 96.95, so the implied average rate is 3.05%

Set up the day-weighted average:

3.05 × 30 = (3.10 × 17) + (R × 13)

91.50 = 52.70 + 13R, so R ≈ 2.985%

The market-implied post-meeting rate is about 11.5 basis points below the current EFFR. Divide by the 25 basis point step: 11.5 ÷ 25 ≈ 0.46. FedWatch would show roughly a 46% probability of a 25 bp cut and a 54% probability of no change.

Suppose instead that the implied change came to 35 basis points of easing. That is more than one full step. The tool would assign full weight to “at least 25 bp” and then split the remaining 10 basis points: about 40% for a 50 bp cut and 60% for a 25 bp cut. This is why FedWatch sometimes shows 50 bp moves even when no Fed official has mentioned one. A 50 bp probability can come purely from how far the futures price sits beyond a single step.

Meetings later in the year

For the next meeting, the starting rate is known. For later meetings it is not, because it depends on what happened at the meetings in between. The methodology chains the calculation: the expected rate after one meeting becomes the starting point for the next, and the probability tree branches at each step. When a meeting falls late in a month, the few post-meeting days give little to work with. The methodology then leans on a neighboring contract month that contains no meeting, since that month’s futures price reflects a full month at the new rate.

The practical effect is that probabilities several meetings out carry the errors and assumptions of every earlier step. They also often show wide spreads across many possible target ranges.

Reading the probability table

FedWatch presents, for each scheduled meeting, the probability of every target range it considers possible, typically in 25 bp increments around the current range. CME’s version of the tool also lets users compare current probabilities with readings from earlier dates.

Several reading habits avoid common mistakes:

• Probabilities by target range are cumulative paths, not single decisions. A 60% probability for a range two meetings out may include different routes, such as a cut now and a hold later, or a hold now and a cut later.
• A high probability measures how concentrated the pricing is. It reflects how one-sided the futures pricing is, not how likely the market is to be right. When pricing is confident, one outcome dominates. When it is uncertain, probability spreads across several ranges.
• Changes over time often say more than the level. A move from 30% to 70% over a week shows that new information shifted expectations. A steady 70% shows that it did not.
• Small probabilities are fragile. A reading in the single digits can reflect a few basis points of noise in the futures price or in where the EFFR sits within its range, rather than a meaningful view.

What moves the probabilities

Futures prices, and therefore FedWatch readings, respond to anything that changes the market’s view of the FOMC’s next move:

• Economic releases, especially inflation, employment and growth data. Hotter-than-expected inflation tends to push pricing toward hikes or fewer cuts.
• Fed communication, including the post-meeting statement, the Chair’s press conference, meeting minutes and speeches by individual officials.
• Geopolitical and financial shocks that change the growth outlook or financial conditions.
• General risk sentiment and positioning in rates markets.

The relationship runs both ways. The FOMC is aware of market pricing, and officials sometimes use communication to move expectations before a meeting rather than surprise markets on the day. When FedWatch shows an outcome above roughly 90% shortly before a meeting, the decision itself often has limited effect on rates. The guidance attached to it, about future meetings, then becomes the main event.

Comparing FedWatch with the Fed’s dot plot

Four times a year, at the March, June, September and December meetings, FOMC participants publish the Summary of Economic Projections. Its best-known element is the dot plot: each dot is one participant’s view of the appropriate year-end federal funds rate for the coming years and the longer run. CME’s FedWatch includes a dot plot view that places markers derived from futures prices for year-end alongside the officials’ dots.

The comparison is useful because the two sources answer different questions. The dots show what policymakers think appropriate policy will be under their own economic forecasts. FedWatch shows what traders are pricing. When the market path sits well below the median dot, traders are betting that the economy will force faster easing than officials currently project, or that officials will revise their views. Neither source is binding. The dots are projections, not commitments, and they change between releases.

How accurate is FedWatch?

FedWatch accurately reports what futures are pricing under its method. Whether that pricing turns out right is a separate question, and the tool has known limitations:

• Expectations change quickly. A probability reflects the information available when the price was set. A single data release can reverse it.
• The 25 bp step assumption is a simplification. The FOMC can and has moved in larger steps, and in emergencies it has acted between scheduled meetings.
• Futures prices are not pure expectations. They can include a risk premium or hedging demand, which can tilt implied probabilities away from what traders genuinely expect.
• EFFR assumptions matter. The calculation depends on where the effective rate trades within the target range. A shift of a few basis points can change small probabilities noticeably.

FAQs

The Bottom Line

Investors, analysts and economists can use FedWatch to see how much of an FOMC decision is already priced in and how that pricing shifts after data or Fed remarks. Its readings describe futures pricing under simplifying assumptions, so they work best for tracking changes over time and comparing against the dot plot, while small and distant probabilities deserve caution.