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, compared with a 75% accuracy using conventional Fed funds futures. A simple backtesting procedure demonstrates that this 13% improvement translates into meaningful 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 remained largely overlooked until recently, according to traffic data. We explore mechanisms to explain why market participants have not fully exploited it. One key reason is that bond yields on FOMC days are primarily driven by unexpected rate surprises, which remain unpredictable even for sophisticated investors.
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(Market expectation toward future FOMC rate decisions using CME FedWatch Methodology)