Methodology

Methodology#

Approach#

A ZQ contract settles at 100 minus the calendar-day average EFFR over its month, so implied average rate = 100 − price. Three steps turn that into meeting probabilities:

  1. EFFR anchor. The fed funds rate only moves when the FOMC moves it, so the latest realized EFFR print (published each morning by the New York Fed, pulled from FRED) is the pre-meeting rate r_pre. The published FedWatch tool anchors the same way.

  2. Day-weighted blend. The meeting ends on day d of an N-day month and the new rate takes effect the next day, so r_avg = (d/N)·r_pre + ((N−d)/N)·r_post; solve for the expected post-meeting rate r_post.

  3. Binary outcome model. If the only outcomes are “no change” and one 25 bp move, P(move) = |r_post − r_pre| / 0.25, clipped to [0, 1]. The current target range is inferred by flooring r_pre to the 25 bp grid.

The full derivation, with a worked example, is in the notebook Replicating the CME FedWatch Tool.

Implementation Notes#

  • The math lives in src/fedwatch.py as pure functions; src/fedwatch_monitor.py assembles them into the forecast used by the chart task, the notebook, and the daily monitor (doit monitor). Both modules have hand-computed unit tests.

  • Contract symbols are parsed with the CME month codes; the single year digit is resolved to the unique year near the data window.

  • Thinly-traded months can miss daily bars, so each contract uses its last available close on or before the as-of date.

  • When a meeting falls in the last ~3 days of a month, the solve is noisy (it divides by N − d), so the forecast reads the next month’s contract directly instead, as FedWatch does.

  • The forecast rolls to the following meeting on decision day itself, since that day’s close already reflects the announcement.

Caveats and Limitations#

  • For a day or two after each decision, the latest EFFR print predates the new target taking effect; those runs are flagged anchor_stale and should be treated as unreliable.

  • Multi-meeting probability trees and moves larger than 25 bps are out of scope by design.