You Have Been Reading FedWatch Wrong. Here Is What It Actually Says.

Nobody told you what FedWatch actually is.

You have looked at it a hundred times. You see the percentages and you assume the CME has a team of economists working that out. That is not what is happening. Not even close.

Those probabilities come directly from Fed Funds futures, a real traded contract where professional money bets on where rates will be at each Fed meeting. 

The ticker is /ZQJ26 (on thinkorswim) if you want to pull it up. 

The CME takes the price of that contract and converts it into a probability. That is the entire process. It's a real market. I'm a real boy.

This matters because it changes how you read the number.

When FedWatch says 95% chance of no cut in June, that is not an opinion or a forecast. 

That is the aggregate positioning of every professional trader, every hedge fund, every institution that has put real capital into that contract. 

They are voting with their money. Right now the vote is no cut through June, July, September, and October. You get all the way out to December and there is still an 80% chance of no cut.

The professional money is not expecting relief on rates for the rest of the year. Not because of what Powell says at a press conference — because that is where real capital is positioned.

Speaking of Powell,  his term as Fed chair is technically ending. But Kevin Warsh, the appointee, has not been confirmed yet. Until he is confirmed the previous chair holds the seat if he wants it. Jerome Powell wants it. Do not expect any surprises on that front.

If Jeff Bierman became Fed chair, all hell would break loose. 

The only upside is I would know every single move before he made it. He would not even have to tell me. It is a gift.

Back to what matters. 

Oil at $112 does not help the rate picture. Demand destruction is already setting in,  that is the point where prices get so high that people just stop spending. 

You pull up to the gas pump, see $5 a gallon, and suddenly that drive to San Diego answers itself. You are not going anywhere. 

Demand destruction is deflationary, and deflation is ultimately what the Fed needs to see before cutting becomes even a conversation.

So the next time you pull up FedWatch, remember what you are actually looking at. Not a forecast. The market's vote. And right now the market is voting no.

The CME is not guessing. Neither should you.

To your success,

Don Kaufman