The question that matters
Before any release, a professional asks: what does the market already expect? Not "what do economists forecast" — what is in the price. The cleanest way to answer that for policy rates is to read it off interest rate futures.
Reading a probability off a futures price
Fed funds futures settle on the average effective rate over the month. If the market assigns probability p to a 25bp hike, the futures rate sits between the current rate and the hiked rate:
implied probability = (futures rate - current rate) / (hike size)
So if the current target is 4.00% and the contract implies 4.10%, the implied probability of a 25bp hike is 0.10 / 0.25 = 40%.
Why this is more useful than the economist forecast
The economist consensus tells you what analysts expect. The futures market tells you what is actually positioned and priced. When those two disagree — consensus says hike, futures say 30% — the surprise is asymmetric, and the market reaction will be larger than the headline surprise suggests.
Reading a full path
Chain the logic across several meetings and you get an expected path: how much total tightening or easing is priced over the next year. Comparing that path before and after a release tells you exactly how much the data changed expectations — which is the actual transmission mechanism from data to price.
Practical uses
- Size the surprise correctly: a print that shifts the path by 10bp is far more important than one that shifts it by 1bp.
- Avoid crowded trades: if 95% is priced, there is almost no reward for being right and a large penalty for being wrong.
- Trade the repricing rather than the number: the move happens because expectations changed, not because the number was "good".
The honest caveat
Futures-implied probabilities embed risk premia and are not pure expectations. Around turns they have been persistently wrong — the market has repeatedly priced more cuts than delivered. Treat them as a positioning read, not an oracle.
How to check this yourself
Before the next central-bank meeting, find the probability of a hike that the rate-futures market is pricing, and write it next to the consensus forecast. The two are often different, and the priced number is the one that decides the reaction. A hike that was 90% priced is not bullish news.