Janet Yellen and her fellow Federal Reserve policymakers took a pass on hiking rates at their May 2-3 meeting. But they’re much more likely to move at the upcoming June 13-14 gathering.
How can I be so sure? Because investors with billions of dollars on the line are betting on it!
Let me start by introducing you to the CME, which was formed by the merger of the Chicago Mercantile Exchange and Chicago Board of Trade.
Like the New York Stock Exchange, it’s a marketplace where institutional and individual investors place trades.
But unlike the NYSE, investors don’t trade shares of stock there. Instead, they use futures, options, and other derivatives to speculate on the direction and level of interest rates.
More specifically, they use Fed Fund futures to express their view on whether and when the Fed will change rates, and by how much. Trading in these contracts is extremely active.
Some 3.8 million of them changed hands in April alone, up 77% from a year earlier. By tracking pricing and trading data, you can determine on any given day whether or not investors think the Fed will move at various upcoming meetings.
But if you’ve never traded futures, or don’t want to bother figuring out the math involved, I have some good news. The CME itself publishes something called the “CME FedWatch Tool,” which is available online here. It does all the work for you.
This is what the graphic looked like on Monday, May 15:
You can see that as of that date, investors believed there was a 73.8% chance the Fed will raise rates by another 25 basis points (to a range of 1% to 1.25%) at the June meeting.
If you look at the bottom right-hand corner of the graphic, you can also see that the chance of a move has gone up in the last few weeks. Investors were only assigning a 54.8% probability of such a move as of mid-April.
Those probabilities change all the time based on incoming data. If the government releases a very strong economic report, they’ll go up.
If Yellen gives a dovish speech about inflation or interest rates, they’ll go down. So as an investor in the interest rate markets, you have to keep a close eye on this tool to stay abreast of market perceptions on future Fed action.
Of course, the CME FedWatch Tool is just one of many, many indicators I follow. If you want to learn more about predicting the future direction of rates … and PROFITING from their movements … be sure to check out my new 5-part course How to Pile Up Profits From the Greatest Interest Rate Cycle in 5,000 Years. It goes into much greater detail, and you can get started with the course by clicking here.
Until next time,
Mike Larson is a Senior Analyst for Weiss Ratings, and is also the creator of the course “How to Pile Up Profits from the Greatest Interest Rate Cycle in 5,000 Years“. A graduate of Boston University, Mike Larson formerly worked at Bankrate.com and Bloomberg News, and is regularly featured on CNBC, CNN, Fox Business News and Bloomberg Television as well as many national radio programs. Due to the astonishing accuracy of his forecasts and warnings, Mike Larson is often quoted by the Washington Post, Chicago Tribune, Associated Press, Reuters, CNNMoney and many others.