What Is the Market Probability Tracker? A Guide to the Atlanta Fed's Rate Forecast Tool
Explore the Atlanta Fed’s Market Probability Tracker — a data tool following real-time market data for future Fed interest rate decisions.
What is the Market Probability Tracker?
The Market Probability Tracker tool analyzes the market’s assessment of future Federal Reserve monetary policy decisions. The tool uses prices of options (or financial contracts) to estimate the probability distribution for where the three-month compounded average Secured Overnight Financing Rate (SOFR), a reference rate for overnight borrowing, is headed in the future.
Why is the Market Probability Tracker useful?
The tool provides a real-time visual representation of where traders and market entities think the Fed will move interest rates. The tracker transforms options on SOFR futures prices into probability distribution values. This allows for an easy-to-understand depiction of both various likelihoods of what could happen and how probabilities have changed over time, given what’s going on in the markets.
Also, the tool draws from Chicago Mercantile Exchange (CME) data — the largest marketplace for this type of financial transaction — thus reflecting current monetary decisions and market conditions as much as possible.
How do you interpret the Market Probability Tracker?
You can input two dates and choose a quarter within the next year, and the tool will present charts and data of market-related probabilities for different interest rate ranges for the period. For example, users can see possible SOFR interest rate levels plotted against the probability that the three-month SOFR average will be in a specified range, among other graphs.
Overall, the tool provides a data-driven view of the market's expectations for future Federal Open Market Committee (FOMC) interest rate decisions using the probability of different three-month SOFR target rate ranges.
What are the Secured Overnight Financing Rate (SOFR) and repo market?
The SOFR is a widely used standard interest rate that reflects the cost of borrowing cash overnight using US Treasury securities as collateral. Basically, it is the dominant benchmark rate for business loans, mortgages, and more and is considered a trusted, transparent rate published by the New York Fed.
These overnight exchanges happen in the repurchase market, or repo market, where repurchase agreements are used for short-term lending and borrowing — so, the SOFR is calculated based on these transactions. The repo market is also where the Federal Reserve conducts open market operations as part of monetary policy.
What are SOFR futures and options on SOFR futures?
SOFR futures represent the expected future values of the SOFR — they are standardized contracts that are traded on exchanges like the CME Group. It is essentially a bet, or hedge, about what SOFR will be like in the future. Options on SOFR futures, on the other hand, allow financial entities to buy or sell a SOFR futures contract at a set price before a set date. Essentially, unlike SOFR futures, the contract does not have to be used depending on which way the market goes.
These are financial tools that allow investors to profit from or hedge against interest rates based on the SOFR over time. These concepts are important to how the Market Probability Tracker estimates the likelihood of future Federal Reserve interest rate decisions.
What are overnight loans, and how are they represented in this tool?
Overnight loans are simply short-term loans, typically made between financial institutions, that are repaid on the next business day. Financial institutions use SOFR to price overnight loans in the repo market. The Market Probability Tracker transforms SOFR prices into probabilities of Fed rate changes.
How is SOFR calculated?
The Federal Reserve Bank of New York calculates SOFR each day using transaction-level data from the Bank of New York Mellon on overnight, specific-counterparty tri-party general collateral repo transactions secured by Treasury securities, along with GCF Repo transaction data obtained from the US Department of Treasury's Office of Financial Research. For more complete information about SOFR's administration, along with detail about the transactions included in the calculation, please visit the New York Fed's website.
What impact do Federal Open Market Committee (FOMC) decisions have on SOFR?
FOMC decisions affect SOFR through the New York Fed's Open Market Trading Desk's (the "Desk's") implementation of monetary policy. Operationally, the Desk is authorized to conduct repurchase transactions with its primary dealers and other eligible financial institutions to apply downward pressure on the federal funds rate and to reverse repurchase agreements to apply upward pressure on the federal funds rate. The Desk also has the authority to conduct unscheduled repurchase transactions should conditions warrant them. Together, these actions can help maintain the federal funds rate within the FOMC's target range and support smooth market functioning. The rates at which repurchase and reverse repurchase transactions are conducted are reflected by SOFR.
For more information about the Desk's monetary policy implementation, go to the New York Fed's website.
Where can I find the Market Probability Tracker and learn more about the data tool?
You can learn more and input your own dates and quarters and experiment with rate probabilities on the Atlanta Fed’s website or with the EconomyNow app.