Market participants are pricing in a 92% probability of a Federal Reserve rate hike at the central bank's September policy decision, according to the CME FedWatch Tool.
The pricing, highlighted by CME Group Inc. (CME), reflects expectations for the Federal Open Market Committee to raise its target interest rate by 25 basis points. CME Group's market commentary on Tuesday cited the 92% probability ahead of the Federal Reserve's decision.
Fed Rate Hike Expectations Remain Elevated
The CME FedWatch Tool tracks interest-rate expectations implied by trading in 30-Day Fed Funds futures. The probability estimates change as investors adjust positions in response to economic data, Federal Reserve communications and financial-market conditions.
The latest pricing comes as investors assess inflation, oil prices and Treasury yields ahead of the September Federal Reserve decision. US Treasury yields have also moved sharply higher. CME Group said the 10-year Treasury yield reached 5.041%, its highest level since 2007, on Tuesday.
Why the Fed Decision Matters for Markets
A change in the federal funds rate can affect borrowing costs, bond yields, the US dollar, and valuations across financial markets. Investors will also be watching the Federal Reserve's accompanying statement and economic projections for indications about the future path of interest rates.
The rate decision itself is only one part of the market reaction, as changes in expectations for subsequent meetings can influence Treasury and equity markets. Higher Treasury yields have already contributed to pressure on US equity futures. CME Group said rising yields and crude oil prices were weighing on equity futures ahead of the Federal Reserve decision.
CME FedWatch Tracks Market-Implied Probabilities
The CME FedWatch Tool does not represent an official Federal Reserve forecast. Instead, it shows probabilities derived from prices in federal funds futures contracts. The 92% probability therefore represents the level of rate-hike expectations reflected in the futures market at the time of the latest CME Group update. Those probabilities can change before and after the Federal Reserve announces its decision.
Investors are also watching oil prices because higher energy costs can add to inflation pressures, potentially affecting expectations for future monetary policy. The Federal Reserve's rate announcement and updated economic projections are expected to provide the next major catalyst for interest-rate markets.