We rebuilt the CME FedWatch tool in 24 hours — here's the methodology
What is the FedWatch tool?
The CME FedWatch tool is one of the most-referenced indicators in finance. It shows the probability of different Federal Reserve rate decisions at upcoming FOMC meetings, derived from Fed Funds futures prices. Every financial journalist, macro analyst, and rates trader watches it.
But the methodology behind it is surprisingly poorly explained. CME's own documentation is dense and academic. Most third-party explainers give you the formula without the intuition. We wanted to change that.
The probability tree algorithm
The core idea is simple: Fed Funds futures prices embed market expectations of future rates. By working backwards from these prices, you can extract the implied probability of each possible rate outcome at each FOMC meeting.
The mathematics relies on a conditional probability tree. Each meeting is a node. The possible outcomes are the rate remaining unchanged, a 25bp cut, a 50bp cut, a 25bp hike, etc. The futures price for each contract constrains the weighted average of all possible paths through the tree.
Step-by-step calculation
1. Get the current effective Fed Funds rate (EFFR) from the Fed's daily publication.
2. Get the ZQ futures settlement prices for the relevant contract months from CME.
3. For the current-month contract, solve for the implied rate after the next FOMC meeting using the day-weighted formula.
4. The probability of a rate change is: P(change) = (implied rate - current rate) / (target rate after change - current rate).
5. For meetings further out, apply the conditional probability tree — each meeting's outcome affects the starting point for the next.
Try the live tool
We've rebuilt the entire FedWatch calculation as a Quadesto visualization. Drop in your own ZQ futures data, or use our live feed, and see the probability tree rendered interactively. Every number is auditable.
This is what Quadesto does: takes complex financial methodology, implements it correctly, and makes it accessible as an interactive, embeddable chart.