Fed Funds Futures Rate on CBOT?

Question

When you see the the CBOT listing the Fed Funds Futures Rate pricing in a 50 bp increase. How do you figure this out from the CBOT data?

"Futures on the Chicago Board of Trade showed a 58 percent chance yesterday the Fed will raise its 2 percent target rate for overnight lending between banks by at least a quarter point at its Aug. 5 meeting, compared with 32 percent the previous day. The contracts showed a 96 percent chance the Fed will increase the rate by December, up from 60 percent odds a week ago." Bloomberg

Answer 1

What they are looking at is the futures price of the Fed Funds contract on the CBOT.  Today, the August contract closed at 97.865.  Take 100, subtract the price, and you get the interest rate...which in this case is 2.135%.  The rate today is 2%.  The expected rate in August is 2.135%, 0.135% higher than today.  All they are doing is taking the expected increase / .25% to come up with a percentage.  So take .135/.25 = 54% in this case.  That assumes the bump comes in June.  The Fed Funds contract takes the average rate for the entire month, so you could assume 25 basis points on Aug 5, which would give a higher percentage.  Also, there is probably a possibility of a 50 basis point move included.  I don't know how they are coming up with the 96%.  The closing price in December is 97.41, indicating 2.59%.  That says the markets are expecting the Fed Funds rate to be 2.59% by December, an increase of 0.59% from today.  The link below is 20 mins delayed...if the markets have opened by the time you read this, the prices may be different than what I posted.  Personally, I'd use the futures prices as a gauge of where to expect rates.  The percentages quoted in a lot of articles seem arbitrary to me.