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Fed Funds Rates Implied by the Market

by Dave Farris

What does the market currently have priced in for cuts in the Fed Funds rate? That is one of the main questions market participants are asking these days as they attempt to forecast the future path of interest rates for the upcoming year. This can be seen in detail on Bloomberg.  The World Interest Rate Probability screen (WIRP) shows the Implied Rates in the market at each upcoming Fed meeting date.   The chart also shows the Implied Rate Change based on these rates, and from there calculates the number of hikes/cuts priced in as well as the % chance of said hike/cut.

Let’s take a look at the mechanics of how this chart works.  Looking at Exhibit 1, the Implied Rate column shows the Fed Funds rates implied from the market. These are the Fed Funds Rates implied as of the upcoming meeting dates shown down the left side of the chart.  The Implied Rate shown is the Effective Rate, not the upper bound rate, so you can add 17 bps to get to the Implied Rate for the Upper Bound.  The Implied Rate Change is the difference between the Cur. Imp. O/N Rate (also the Effective Rate), 5.326 in this case, and that meeting’s Implied Rate.  For example, the Implied Rate Change for 5/01 is -0.178 which is 5.326 - 5.148.  For 9/18 this is 5.326 - 4.529 = -0.797.

The #Hikes/Cuts is the number of hikes or cuts expected up through the meeting date based on 25 bp movements.  For example, for 5/01, the Implied Rate Change of -0.178 is divided by 0.25 to equal -0.714 cuts (0.178 / .25 = .714), or almost one 25 bp cut.  For 9/18, the calculation is -0.797 / 0.25 = 3.188 cuts through 9/18/2024.

The %Hike/Cut is the percentage change of a move being made by the Fed for that particular meeting date.  For 5/01, (-0.178 - 0.043) / .25 = 54.0% chance that the Fed cuts rates by 25 bps on 5/01.  On 9/18, this is (-0.797 - 0.579) / .25 = 87.3% chance of a 25 bp cut on 9/18.

These rates will change as treasury rates change in the market.  For example, Exhibit 2 is on the same day as Exhibit 1, 02/13/2024.  The difference is Exhibit 1 was before the CPI (Consumer Price Index) announcement for January and Exhibit 2 is after.  You may remember there was a big bond market sell off after this announcement because the CPI surprised to the upside, implying that inflation may not yet be under control which could force the Fed to keep the Fed Funds Rate higher for longer.  Note the difference in the January 2025 rate of these two exhibits, 4.045% vs 4.30%.  One whole cut was priced out of the market in a matter of a few minutes on 02/13/2024.

Speaking of cuts being priced out of the market, note the Implied Rate in January 2025 one month prior on 1/12/2024 shown in Exhibit 3 below.  The Implied Rate then was 3.50% so in one month, the market has taken out 3 cuts, going from 7 cuts to 4, with the Implied Rate for 1/29/2025 changing from 3.50% on 1/12/2024 to 4.30% on 2/13/2024.