When financial headlines say markets see a “60% chance of a Fed rate hike,” that number usually is not produced by an economist taking a survey. It is derived from prices in the federal funds futures market.
The CME FedWatch Tool converts those futures prices into implied probabilities for possible Federal Reserve interest-rate outcomes at upcoming FOMC meetings. In simple terms, it answers: What path for the federal funds rate is the futures market currently pricing?
FedWatch is widely followed by traders because those expectations can move quickly after inflation reports, employment data, Federal Reserve speeches and other economic developments.
Most importantly, however, FedWatch is not the Federal Reserve’s forecast. It measures market expectations, and those expectations can change dramatically before policymakers actually meet.
How CME FedWatch Calculates Fed Rate Probabilities
The calculation starts with 30-Day Federal Funds futures, traded at CME Group.
These contracts settle using the average daily Effective Federal Funds Rate, or EFFR, during a particular calendar month. The EFFR itself is a volume-weighted measure of overnight unsecured lending transactions between eligible financial institutions and is published by the Federal Reserve Bank of New York.
Federal funds futures are quoted using a simple convention:
Implied rate = 100 − futures price
If a contract trades at 96.25, for example, the market-implied average federal funds rate for that contract month is approximately:
100 − 96.25 = 3.75%
The important complication is that an FOMC meeting may occur partway through a month. Part of that month's futures contract therefore reflects the rate before the meeting and part reflects the expected rate afterward.
CME uses that relationship, together with futures contracts for surrounding months, to estimate the rate change markets are pricing around each FOMC meeting.
FedWatch generally assumes policy changes occur in 25-basis-point increments, where 25 basis points equals 0.25 percentage points.
Consider a simplified example. Suppose the futures market implies that rates should rise by an average equivalent of 0.15 percentage points around an upcoming meeting.
Divide that expected change by 0.25:
0.15 ÷ 0.25 = 0.60
Under a simplified two-outcome setup, that would imply approximately a 60% probability of a 25-basis-point increase and a 40% probability of no increase.
The actual FedWatch calculation becomes more complex across multiple meetings because CME constructs a probability tree covering different possible paths for interest rates.
How to Read the FedWatch Tool
The most useful part of FedWatch is the table showing possible target-rate ranges for a future FOMC meeting.
The Federal Reserve does not normally announce one exact federal funds rate. Instead, the FOMC establishes a target range.
As of August 31, 2026, that target range is 3.50%–3.75%, following the Fed's July 29 decision to keep policy unchanged. This number is date-sensitive and will change whenever the FOMC adjusts rates.
The next scheduled FOMC decision is September 16, 2026, following the September 15–16 meeting.
As a real-world example of how quickly expectations move, markets on August 31 assigned roughly a 60.4% probability to a September rate increase after Federal Reserve Chair Kevin Warsh's Jackson Hole remarks. Only days earlier, the implied probability had been around 35%.
This is exactly what FedWatch is designed to capture: not a static prediction, but the changing price investors are placing on possible monetary-policy outcomes.
Coinpaper's recent coverage of Treasury yields showed the same repricing appearing in the bond market, where the policy-sensitive two-year Treasury yield jumped as rate-hike expectations increased.
What Makes FedWatch Probabilities Change?
Anything that changes expectations for inflation, employment, economic growth or Federal Reserve policy can move federal funds futures.
Four catalysts matter especially often:
- Inflation: CPI, PCE and PPI reports can change expectations for whether policy needs to become tighter or easier.
- Employment: Payroll growth, unemployment and wage data affect the Fed's assessment of the labor market.
- Fed communication: Speeches, meeting minutes and press conferences can cause futures traders to reprice the expected policy path.
- Financial conditions: Treasury yields, credit conditions, oil prices, the dollar and major economic shocks can alter the outlook.
Recent markets provide useful examples. A cooler June CPI report quickly reduced expectations for tighter policy and helped Bitcoin rally, as shown in Coinpaper's coverage of inflation and Bitcoin. Conversely, higher rate expectations later weighed on risk assets as Bitcoin tested important support levels. Fed expectations and crypto
For readers specifically following digital assets, Coinpaper's broader FOMC and crypto guide explains why changes in monetary policy can influence liquidity, bond yields and investor appetite for assets such as Bitcoin.
FedWatch Is a Market Price, Not a Prediction
The most common mistake is reading a FedWatch probability as if it were an official prediction.
A 70% probability of a rate hike does not mean CME or the Federal Reserve is forecasting a hike with 70% confidence.
It means federal funds futures prices are consistent with roughly that implied probability under CME's methodology and assumptions.
Those assumptions include 25-basis-point policy increments and a proportional response in the effective federal funds rate. CME explicitly notes that calculated probabilities are estimates and can vary if those assumptions do not hold.
FedWatch also offers different ways of viewing future policy probabilities. Its traditional conditional approach builds possible interest-rate paths meeting by meeting, while its newer aggregated view measures expected changes relative to the current target range. The two approaches answer slightly different questions about when and how much rates may change.
That is why the tool is best treated as a live gauge of market expectations.
When an inflation report suddenly moves a Fed probability from 30% to 60%, the important information is not that the market has discovered what the Fed will do. It is that traders have sharply repriced the cost and likelihood of a particular monetary-policy path.
For investors, that shift can be just as important as the eventual FOMC decision.
