Why Fed Forecasting Tools Are Worth Watching

Professional football games, the weather, and Federal Reserve interest rate policy may seem like wildly divergent subjects, but they all share at least one commonality: People are forever attempting to predict the outcomes of each with varying degrees of success.

Football fans may disagree, but the stakes don't get much higher than Fed policy. In 2024, that was certainly the case as the U.S. central bank grew closer to moving away from a historically aggressive policy-tightening phase toward rate-cutting for the first time in over four years. That shined a particularly bright spotlight on the CME FedWatch Tool and other indicators that aim to place odds on the Fed's rate moves.

How accurate are those odds? One way investors might look at it is to remember that even the best Las Vegas oddsmakers and TV meteorologists don't always get it right. The FedWatch Tool may not be perfect, but it still can be a valuable mechanism offering investors a real-time, market-based window into ever-shifting expectations and sentiment.

"Keeping a close eye on rate expectations through the FedWatch Tool and other indicators can help individual investors prepare and potentially capitalize on rate movements when they happen," said Collin Martin, director of fixed income strategy at the Schwab Center for Financial Research. "If we move into a lower-rate environment, as the Fed has signaled, it's important to get early perspective on how that may impact various asset classes in a portfolio."

Watching such tools may be a good idea for investors, but it may be even more important to understand how they work. We'll focus mainly on FedWatch.