What happens Wednesday

The Federal Reserve's monetary policy committee, the FOMC, meets this week and announces its interest rate decision at 2:00 PM Eastern Time on Wednesday, according to Nasdaq Markets (nasdaq.com). The decision on the policy rate, the fed funds rate, sets the tone for nearly all other interest rates in the US financial system — from mortgages to corporate loans and treasury yields.

For investors, the meeting isn't just about the number itself. What the market really cares about is how well the outcome is already priced in, and what signals the Fed chair gives about the path ahead.

CME FedWatch: the market's own crystal ball

The most widely used tool for gauging market expectations is CME FedWatch, developed by CME Group. The tool converts prices on 30-day fed funds futures into percentage probabilities for rate cuts, rate hikes, or an unchanged rate at upcoming FOMC meetings.

The methodology is based on a formula where the contract price is set to 100 minus the market's expected average effective policy rate for the contract month. Because FOMC meetings typically fall in the middle of the month, CME FedWatch splits the month into days before and after the meeting to isolate the market's expectation for the new policy rate. The probabilities are then calculated through a binary tree structure system that assumes standard 25-basis-point increments.

88%
accuracy 30 days before the meeting
75%
accuracy for raw futures pricing
>90%
historical directional accuracy near meeting date

According to an academic study from the European Financial Management Association (EFMA), the binary FedWatch model has correctly predicted the outcome in around 88 percent of cases when measured 30 days before the meeting. That's significantly better than using raw futures prices without the binary calendar adjustment, which in the same study was correct only about 75 percent of the time.

When the Fed rarely surprises

There's a threshold that market participants watch closely: historically, the Fed has rarely surprised when CME FedWatch prices an outcome above 80-85 percent probability as the central bank enters its two-week-long "blackout period" before the meeting. The Fed prefers to avoid sudden, unexpected tightening or easing in financial markets.

At the same time, analysts warn against blindly trusting futures pricing alone. Market strategist Barry Habib has pointed out that fed funds futures are highly volatile, and that 10-year and 2-year treasury yields often provide a more stable picture of what the Fed is likely to do over a somewhat longer time horizon.

CME FedWatch is correct in nearly nine out of ten cases — but only when looking 30 days ahead, not further

The tool's reliability deteriorates quickly beyond a 60-90 day horizon. An example from March 2023 shows that futures at the time priced in an effective policy rate of around 4.00 percent by year-end — the actual rate ended up at 5.25-5.50 percent that same year. This illustrates why market participants should use FedWatch as a short-term indicator, not a long-term forecast.

Why this also matters for the crypto market

The rate decision has direct consequences for risk assets, including digital assets. Real yields on short-term treasuries and money market funds compete directly with returns from tokenized assets and stablecoin-based savings products. When FedWatch signals an aggressive cutting cycle, the risk-free rate of return falls, which has historically pulled capital back toward more volatile assets like bitcoin and ether.

With bitcoin trading around $80,183 and a Fear & Greed Index at 48 out of 100 — a neutral level — the market is in a wait-and-see position ahead of the meeting. A dovish surprise could weaken the US Dollar Index (DXY) and provide a tailwind for risk assets, while a hawkish tone has historically strengthened the dollar and put downward pressure on crypto prices.

When FedWatch shows a near 50/50 split between two possible outcomes ahead of an announcement, it has also historically resulted in higher implied volatility in bitcoin options and funding rates in the derivatives market — a sign that the market is pricing in genuine uncertainty, not just an expected outcome.

When FedWatch prices an outcome above 80-85 percent probability, the Fed rarely surprises the market

Norwegian context: interest rate differentials and the krone exchange rate

Although the meeting concerns US monetary policy, it indirectly affects Norwegian conditions. The interest rate differential between the Federal Reserve and Norges Bank is a key driver of the krone's exchange rate against the dollar, and swings in US rate expectations often quickly feed through into the currency market. A weaker dollar following a dovish Fed signal could contribute to a stronger krone, while a hawkish surprise has historically gone the opposite way. This is also relevant for the oil price, which is typically traded in dollars and thus affected by the dollar's strength independent of supply and demand in the oil market.

Investors should therefore watch not only the rate decision itself on Wednesday, but also the Fed chair's press conference and the written statement, which often provide more information about the future rate path than the number itself.