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I just accessed the CME FedWatch Tool at 10:27am ET.

It reported mid price of ZQZ2 as 95.8788 and a corresponding probability of 74.7% of 50bp hike at Dec FOMC meting (vs 75bp).

For December, as this question explains, there are 14 days of effective Fed funds rate at 3.83% and 17 days of EFFR to be decided at the Dec 14 FOMC meeting.

The implied probability should be (futures MID - weighted EFFR)/(size of hike * num of days after hike/total), which, for 50bp, is (95.8788 - 95.6216)/(0.5 * 17/31) and that's 93.8%.

Why is there such a large difference between what should make intuitive sense and the CME FedWatch Tool number?

Btw, when I accessed the page earlier, it reported the same probability for a different ZQZ2 mid of 95.8738. How can that be?

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  • $\begingroup$ If you look at the methodology on your link of the CME, you see it's different from your calc. $\endgroup$
    – AKdemy
    Dec 3, 2022 at 0:03
  • $\begingroup$ @AKdemy: Are you saying what I did (or what the CBOT doc did in the linked question) is incorrect? Or are you just pointing out difference in appearance? $\endgroup$
    – Argyll
    Dec 3, 2022 at 22:21
  • $\begingroup$ I have not looked at the doc you reference because as written, the CME link itself has the methodology and an example. With your numbers, there would be a probability of decrease, not hike, because 4.1212 is a lower interest rate than 4.3784. $\endgroup$
    – AKdemy
    Dec 3, 2022 at 22:49
  • $\begingroup$ @AKdemy: That's not true. 14 days out of December's 31 days will have had EFFR at 3.83. Any future price lower than 96.17 implies a probability of increase, and not decrease. Certainly my numbers don't say such a thing. $\endgroup$
    – Argyll
    Dec 3, 2022 at 23:38
  • $\begingroup$ What is the interest rate of 95.8788 and 95.6216. In any case, the method doesn't use the price like you did. $\endgroup$
    – AKdemy
    Dec 4, 2022 at 7:05

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My analysis shows in the last 2 years and roughly 9 rate hikes, the the "CME FedWatch Tool" was completely wrong 4 times! That is HUGE (approaching 50% wrong)!

The following dates reflecting the FOMC meeting for which the CME FedWatch Tool made predictions a few weeks prior.

July 27, 2022 0% prediction and the fed DID raise rates. Sept 21, 2022 at 54% predicting no change and they raised rates.

Nov 2, 2022 > while the probability of a hate hike was correct at 70% .. all 70% was signalling a 50 bases point hike and 0% of a 25% which is actually what happened.

Dec 14, 2022 got it completely wrote at 0% predicted any change, but the feds did raise rates.

My point is that I can't see why SO MANY PEOPOLE (cites it as some sort of proof) when the results of the CME FedWatch Tool predictions a few weeks before the FOMC meeting have such a history of being COMPLETELY wrong (it's not like it said 25% and that was wrong - it sometimes read 0% chance and that is wrong ).

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    $\begingroup$ You need to realize it is an implied probability from market quotes. The rate decision itself is at the discretion of the FED. You cannot expect this to be like tossing a fair dice. Even in the case of a fair dice though, with so few observations, there is no way exept luck for getting the probabilities right. No one claims its"proof". $\endgroup$
    – AKdemy
    Sep 13 at 22:09
  • $\begingroup$ "all 70% was signalling a 50 bases point hike and 0% of a 25% which is actually what happened." <-- Did the website actually say that? That doesn't make sense regardless of the eventual outcome. $\endgroup$
    – Argyll
    Sep 18 at 1:05

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