Market-implied probabilities of Federal Reserve rate changes at upcoming FOMC meetings, derived from Fed Funds futures prices. Track rate cut expectations, hold probabilities, and the implied Fed Funds rate for each meeting.
What is FedWatch and what does it show?
The FedWatch tool shows the probability of Federal Reserve interest rate changes at each upcoming FOMC meeting. Probabilities are calculated from Fed Funds futures (30-day Federal Funds futures, ticker ZQ) using the same day-weighted methodology as the CME FedWatch tool. When the "Hold" bar dominates, the market expects no change. When "-25bp" or "-50bp" bars are large, the market is pricing in rate cuts.
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Federal Reserve rate probabilities are extracted from 30-day Federal Funds futures contracts (ZQ) traded on the Chicago Mercantile Exchange. Each ZQ contract settles at 100 minus the average daily effective Federal Funds rate for its delivery month. By comparing the implied rate embedded in the futures price with the current Federal Funds target rate, analysts can derive the probability that the Federal Open Market Committee will change rates at a given meeting.
The calculation accounts for the fact that FOMC meetings typically occur mid-month. A day-weighting formula separates the portion of the month before the meeting (when the old rate applies) from the portion after the meeting (when the new rate would apply). This isolation of the post-meeting implied rate is what allows the extraction of a clean probability for each rate outcome.
For meetings where multiple rate outcomes are possible, a conditional probability tree is constructed. The tree works backwards from the furthest meeting to the nearest, with each node representing a possible cumulative rate path. The probabilities at each node must sum to 100%, and the implied rate at each node must be consistent with the observed futures price. This methodology is the same approach used by the CME Group's official FedWatch tool.
Fed Funds futures are derivative contracts whose settlement value is determined by the average overnight Federal Funds rate during the contract month. They trade on the CME under the ticker symbol ZQ, with monthly expirations stretching out roughly two years. Each contract has a notional value of $5 million and is quoted as 100 minus the expected average Federal Funds rate.
These contracts matter because they aggregate the views of the most sophisticated participants in the interest rate market. Banks use them to hedge funding costs. Hedge funds use them to speculate on monetary policy. Because participants have real capital at risk, the prices are considered a high-quality signal of rate expectations.
The term structure of Fed Funds futures — the implied rates across successive contract months — reveals the market's expected rate path. A declining term structure implies expected rate cuts. A rising term structure implies rate hikes. Comparing this against the Federal Reserve's Summary of Economic Projections reveals where markets and policymakers disagree.
For the next scheduled FOMC meeting, the probabilities are highly reliable. When FedWatch shows a probability above 80% for a particular outcome in the week before a meeting, that outcome has materialised in the overwhelming majority of cases over the past two decades. The Federal Reserve rarely surprises the market at this short horizon.
Accuracy degrades at longer horizons. Probabilities for meetings three to six months away should be interpreted as directional estimates rather than precise forecasts. In early 2022, markets expected only modest rate increases; by mid-2022, the Fed had embarked on the fastest hiking cycle in four decades.
Futures-implied probabilities are risk-neutral — they incorporate a risk premium that can bias estimates. Far-dated cut probabilities may be somewhat overstated because investors pay a premium for insurance against economic downturns. Despite this, futures remain the most widely used measure of monetary policy expectations.
For macro and fixed income: Track how probabilities shift in response to economic data releases — non-farm payrolls, CPI, PCE, and retail sales are the most impactful. Compare the market-implied rate path against the Fed's Summary of Economic Projections to identify disagreements between markets and policymakers.
For equity and currency markets: Rate cut expectations tend to support equities and weaken the US dollar. Rate hike expectations tend to pressure equities and strengthen the dollar. Pay particular attention to meetings where the probability is close to 50/50 — these generate the most volatility.
For risk management: Use the probability distribution to stress-test portfolios. If the market prices a 70% chance of a cut but your portfolio is positioned for a hold, understand your exposure. The speed of probability changes is itself an informative signal about market confidence in the economic outlook.
The market has high confidence the Fed will leave rates unchanged. Economic data is either mixed or consistent with the current policy stance. Volatility around the meeting is typically low.
The market expects the Fed to ease monetary policy. Typically occurs when economic data has weakened or financial conditions have tightened sharply. The size of the expected cut signals urgency.
When successive meetings each price a cut at high probability, the market expects a sustained easing cycle. Compare cumulative implied cuts with the Fed's dot plot to find disagreements on the pace of normalisation.
Data disclaimer
Probabilities shown are derived from delayed Fed Funds futures data and are representative of recent market conditions. For real-time probabilities, refer to the CME Group's official FedWatch tool. This page is for educational and analytical purposes and does not constitute investment advice.
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