The Federal Reserve’s quarterly updated summary of economic projections, released yesterday, anticipates two quarter-point rate reductions in 2025, potentially moving the key benchmark to a midpoint of 3.875% from 4.375%.
Meanwhile, the “Yes” answer to the ForecastTrader Contract asking will the US Fed Funds Target Rate be set above 3.375% at the FOMC meeting ending December 10, 2025, is priced at $0.55, corresponding to a 55% probability that the central bank will drop its rate by 0.75% or less this year.
Source: ForecastEx
Note: Prices are as of the morning of March 20, 2025.
I like the “Yes” answer, as I think sticky price pressures will prevent the committee from cutting by 1 full percentage point or more this year. The Fed, for its part, revised its inflation estimate north in yesterday’s forecast.
Source: Federal Reserve
Note: Highlighted by J. Torres to demonstrate the upward adjustments to the Fed’s 2025 inflation forecasts as well as the expectation for 2 rate reductions this year. The March SEP can be found on the Federal Reserve’s website.
As with all ForecastTrader contracts with the correct “Yes” or “No” answer, it would pay $1.00 to the correct side. In the meantime, the instrument is earning 3.83% APY, proportionate to the changes in its price, with an interest-like incentive coupon. The APY is adjusted commensurate with increases or decreases in the fed funds rate.
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