Watching the FedWatch

51 Pages Posted: 16 Jan 2025 Last revised: 27 Jan 2025

See all articles by Stefano Bonini

Stefano Bonini

Stevens Institute of Technology - School of Business

Shengyu Huang

Stevens Institute of Technology - School of Business

Majeed Simaan

Stevens Institute of Technology - School of Business

Date Written: January 10, 2025

Abstract

The popularity of the CME FedWatch as a tool for forecasting monetary policy has increased rapidly. We investigate its statistical and economic value for market participants. Our analysis shows that this simple binary model can predict the Federal Open Market Committee (FOMC) rate decisions with an 88% accuracy 30 days before FOMC meetings. On the other hand, conventional predictions based on Fed fund futures result in a 75% accuracy. A simple backtesting procedure demonstrates that this 13% accuracy improvement translates into significant economic gains. Further empirical evidence indicates that the tool effectively reduces uncertainty ahead of FOMC meetings, mitigating the well-documented pre-FOMC drift. Despite its strong predictive power, the FedWatch has remained largely overlooked until recently, according to traffic data. We explore several mechanisms to explain why market participants have not fully exploited such tools. One key reason lies in the fact that bond yields on FOMC days are predominantly driven by unexpected rate surprises, which remain unpredictable even for sophisticated investors.

Keywords: Fixed Income, Financial Risk Management, Monetary Policy, Fed Funds Futures

Suggested Citation

Bonini, Stefano and Huang, Shengyu and Simaan, Majeed, Watching the FedWatch (January 10, 2025). Available at SSRN: https://ssrn.com/abstract=5093703 or http://dx.doi.org/10.2139/ssrn.5093703

Stefano Bonini

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Shengyu Huang

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

Majeed Simaan (Contact Author)

Stevens Institute of Technology - School of Business ( email )

Hoboken, NJ 07030
United States

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