Market Probability Tracker

This tool estimates the market-implied probabilities of various ranges for the three-month average fed funds rate. Our methodology uses data on three-month Eurodollar futures, options on three-month Eurodollar futures from the Chicago Mercantile Exchange (CME), three-month LIBOR/fed funds basis swap spreads expiring in 12 months, and the Treasury yield curve.

Estimates from the four-nearest quarterly expiring contracts are updated daily using the previous day's closing prices. To illustrate changes in the market's assessment of the average fed funds rate over future three-month intervals, users can view and compare estimates from the prior six weeks for individual contracts. In this tracker we provide the path the market expects the three-month average fed funds rate to take, along with the 5th to 95th percentile region; the probability of a 25 basis point rate hike or cut for the three-month interval starting on the contract's expiration date; and how likely market participants are assessing various future outcomes, distributed across a wide range of possible rates.

An overview of our approach can be found in our Notes from the Vault. For a more detailed look at the model, please refer to this paper and technical note on its implementation.

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  • Distributions

    Use the options below to change the observation date(s) and contract you'd like to view.

  • Frequently Asked Questions

    What are Eurodollars?

    Eurodollars are term deposits denominated in U.S. dollars, but they are held in foreign banks or in the foreign branches of U.S. banks. U.S. dollar LIBOR is the key benchmark rate for the Eurodollar market. It is the average interest a bank would have to pay to borrow Eurodollar deposits.

    What are Eurodollar futures and options on Eurodollar futures?

    Eurodollar futures are derivative contracts that deliver three-month Eurodollar deposits at specific dates in the future. The rate associated with a futures contract, the three-month LIBOR, is based on the market’s expectation of the cost of a three-month Eurodollar deposit once the futures contract expires and the deposit is delivered to the contract holder.

    Options on Eurodollar futures are derivative contracts that give the holder the right, but not obligation, to buy or sell Eurodollar futures expiring on (or before) a specific date for a specific price, called the strike price. The price of an option, called the option premium, is based on where the market expects the price of a three-month Eurodollar deposit will be relative to the option’s strike price once the option expires. Thus, option premiums contain information about the probability the price of a three-month Eurodollar deposit will be either above or below the strike price specified in the option contract at expiration.

    What impact do FOMC decisions have on Eurodollar rates?

    Fed funds are unsecured overnight loans that depository institutions and other eligible parties make to each other to maintain their required reserve balances with the Federal Reserve. The rate charged for entering into these loans is sensitive to the overall level of reserves in the System. The Federal Reserve, through the Federal Open Market Committee and the trading desk at the New York Fed, can adjust this level to manage short-term rates.

    Fed funds and Eurodollars are regulated similarly, and financial institutions view Eurodollars as close substitutes for fed funds. While there are factors that can drive a wedge between otherwise identical fed funds and Eurodollar securities, arbitrage and competitive forces tend to keep these differences relatively small. As a result, three-month Eurodollar futures can be thought of as the sum of an average expected overnight rate (the item of specific interest) over three months starting when the contract expires, plus a term premium. We use swaps market data to estimate the expected term premium.

    Options on Eurodollar futures provide a complementary and perhaps broader view on market expectations than is provided by fed funds futures data alone. Nevertheless, there are some challenges associated with using Eurodollar-related data. Each possible target range for fed funds is associated with its own average expected overnight rate, and there may be some slippage between that expected rate and the center of the target range. Additionally, uncertainty about future term premiums blurs the picture somewhat and makes it difficult to identify specific target ranges. This blurring effect increases the farther out we look into the future.

  • References and Resources