Sizing Up Market Expectations for the FOMC

Tomorrow afternoon, all eyes will once again be focused on the Federal Reserve.  Although market expectations do not favor a hike, there is a persistent perception that one could occur.  As meaningful as the rate decision might be, it may be equally important to listen to Chair Warsh’s tone and commentary at the post-meeting press conference.  There is still much for investors to learn about how the new chair will lead the central bank in the months ahead and throughout his term.

According to CME FedWatch, which imputes rate move expectations from Fed Funds futures, there is currently a 30% probability for a hike at tomorrow’s meeting.  IBKR Prediction Markets, which have consistently shown lower expectations than the CME, currently have a 27% “Yes” for rates above 3.625%.  In either case, these markets indicate that a hike would be considered a surprise to the majority of market participants. 

Source: IBKR Prediction Markets

Prior Fed leadership had been generally loath to surprise markets unless they deemed it absolutely necessary.  A move by the Warsh-led FOMC would certainly break that precedent.  The question is whether the current FOMC deems both a hike AND a surprise to be absolutely necessary. 

Nonetheless, there will be much to be gleaned from the statement and the press conference.  Last meeting’s statement was significantly more concise than the prior version, which was likely a signal of Warsh’s preference for a less communicative central bank.  A key statement of intent came from his announcement of five task forces on communications, balance sheet policy, data, productivity and jobs, and inflation frameworks.  Expect several questions about the progress and early efficacy of those working groups.  Personally speaking, those are likely to be utilized in the short term to buy a few months buffer between a President who clearly desires rate cuts and a market that expects them as soon as September.  They could serve to forestall a rate move until after the midterm elections, which Warsh and the committee might find politically expedient.

As for equity markets, options on the S&P 500 (SPX) seem to imply a “status quo” move from the FOMC.  Probability distributions for SPX options expiring tomorrow and Friday both show an upside bias, with peaks at the 7480 and 7515 levels, respectively.  Skews for near-term options, however, do show a pronounced asymmetry with a bias toward downside options.  At-money options show implied daily volatilities of 1.09% and 1.07%, respectively.   Those are modestly above the 10-day historical volatility of 0.85%.  Considering that the rest of the week includes not only an FOMC meeting, but also earnings from Meta Platforms (META) and Microsoft (MSFT) on Wednesday afternoon, along with Amazon (AMZN) and Apple (AAPL) earnings on Thursday afternoon, I’ll leave it to intelligent readers to decide if that implied volatility premium is sufficient in the current environment.

IBKR Probability Lab for SPX Options Expiring July 29^th, 2026

Source: Interactive Brokers

IBKR Probability Lab for SPX Options Expiring July 31^st, 2026

Source: Interactive Brokers

Skews for SPX Options Expiring July 29^th (top), July 31^st (middle), August 21^st, 2026 (bottom)

Source: Interactive Brokers

Source: Interactive Brokers