Investors have responded to higher levels of economic uncertainty and market volatility by increasing their expectations of Federal Reserve rate reductions this year. But the potential inflationary impact of a global trade war may limit the extent of cuts, while on the other hand, an ailing economy with risks of job losses may compel the Fed to ease policy in a rush. At the moment, our IBKR ForecastTrader prediction market prices approximately three 25-basis point decreases in the US Fed Funds Target Rate, as the 3.625% threshold for December offers “Yes” and “No” contract answers at $0.43 and $0.55, corresponding to 43% odds that the Fed cuts two times or less this year and 55% odds that it cuts three or more times by year end, since the current mid-point rate is 4.375%. Meanwhile, because this contract expires near the end of the year, investors on either side will collect interest-like incentive coupons for more than eight months at an annualized rate of 3.83%1 on the market value of their open positions as probabilities shift. If you’re a hawk, you may favor the “Yes” answer here while doves may favor the “No” answer. Furthermore, additional thresholds below and above 3.625% offer additional opportunities for speculators and hedgers alike who want to focus on multiple interest rate levels.
Source: ForecastEx
Note: Prices are highest bids as of the morning of April 4, 2025.
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- Payments equivalent to interest in the form of an incentive coupon subject to variation with benchmark rates.
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Divulgación: ForecastTrader
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Terrible product. Promotes the gamification of the Market. Invest your money, but keep your betting to sports.