Fed funds futures: how markets price rate cuts

The CME 30-Day Federal Funds futures contract (ticker ZQ) settles on the average of the daily effective federal funds rate (EFFR) over its contract month. The EFFR is published each business day by the Federal Reserve Bank of New York and normally trades inside the target range the Federal Open Market Committee (FOMC) sets.

The contract is quoted as 100 minus that average rate. A September contract trading at 96.10 implies an average EFFR of 3.90% for September. Read across a strip of consecutive months, the prices form a market-implied path for the policy rate.

Because each contract averages every day of its month, a rate change decided at a meeting on the 17th affects only the days after it. The contract for that month blends the old rate and the new one, weighted by days.

To isolate what the market expects a meeting to do, the rate implied for the days after the meeting is solved from the month's average and the rate expected going into it. That is why the per-meeting figure on the Aerarium macro page can differ from the simple gap between two monthly dots: the dots are monthly averages, while the meeting figure is the day-weighted post-meeting rate.

FOMC moves are usually made in steps of 25 basis points. Dividing the implied change at a meeting by 25 bp gives the number of cuts (or hikes) priced. An implied change of −15 bp reads as 0.6 of a cut — often described as roughly a 60% probability of a 25 bp cut, under the simplifying assumption that only "hold" or "cut 25" are possible.

Tools such as CME FedWatch apply the same idea with their own conventions for meeting dates and month-end effects, so their published probabilities can differ slightly from a simple calculation on the same day.

Futures prices reflect positioning and risk premia as well as expectations, and they move every trading day. A priced cut is the market's current consensus, not a commitment from the Fed and not a forecast from Aerarium.

The FOMC holds eight scheduled meetings a year; four of them (March, June, September, December) include the Summary of Economic Projections. Comparing the futures path with those projections, and with the Treasury yield curve, gives fuller context than any single series.