The Federal Reserve’s Interest Rate Decision: May and June 2021

According to CME’s “Federal Reserve Observation”, the probability of the Federal Reserve maintaining interest rates unchanged in May is 62.4%, and the probability of raising interest rates by 25 basis points to the range of 5.00-5.25% is 37.6%; The probability of a 25 basis point interest rate cut by June is 0%, the probability of maintaining the interest rate unchanged is 62%, the probability of a cumulative 25 basis point interest rate increase is 37.8%, and the probability of a cumulative 50 basis point interest rate increase is 0.2%.

The probability of the Federal Reserve raising interest rates by 25 basis points in May is 37.6%

The Federal Reserve, the central banking system of the United States, has the responsibility of regulating the country’s monetary policy. One of the main tools that the Federal Reserve uses to achieve its objectives is interest rates. The decision to maintain or adjust interest rates can have significant implications for the economy, investors, and consumers.
In this article, we will discuss the probabilities outlined in CME’s “Federal Reserve Observation” concerning the Federal Reserve’s interest rate decision for May and June 2021. We will analyze the likelihood of the Federal Reserve maintaining interest rates, increasing interest rates, or decreasing interest rates.

Understanding CME’s “Federal Reserve Observation”

CME’s “Federal Reserve Observation” is a market-based tool that uses futures contracts to predict the probability of a particular outcome. In this case, the tool is used to predict the probability of the Federal Reserve maintaining or adjusting interest rates.
The tool calculates probabilities by analyzing the trading activity of investors in the futures market. Investors in the futures market make trades based on their expectations of future interest rate moves. Thus, the trading activity in the futures market of these investors is an indication of what they believe may happen in the future regarding interest rates.

Probability of Interest Rates Staying Unchanged

CME’s “Federal Reserve Observation” predicts that there is a 62.4% probability of the Federal Reserve maintaining interest rates unchanged in May. This decision will come after the Federal Reserve’s two-day meeting on May 18 and 19, 2021. The tool also predicts a 62% probability of interest rates staying unchanged by June.

Probability of an Interest Rate Increase

CME’s “Federal Reserve Observation” also predicts that there is a 37.6% probability of a 25 basis point interest rate increase to the range of 5.00-5.25% by May. The tool further predicts a cumulative 25 basis point interest rate increase by June with a 37.8% probability. The less probable outcome of a cumulative 50 basis point interest rate increase by June has a 0.2% probability.

Probability of Interest Rate Cut

The tool predicts that the probability of the Federal Reserve implementing a 25 basis point interest rate cut by June is 0%. It follows that the probability of interest rates remaining unchanged is 62%.

Conclusion

CME’s “Federal Reserve Observation” provides an insight into what investors predict regarding the Federal Reserve’s interest rate decisions. In May and June 2021, the tool predicts that there is a higher probability of interest rates staying unchanged or increasing slightly rather than decreasing.
It is important to note that the probabilities provided are only predictions based on the trading activity of investors in the futures market. Actual interest rate decisions made by the Federal Reserve may differ, and the tool should be used cautiously.

FAQs

Q1. What is the Federal Reserve?
A. The Federal Reserve is the central banking system of the United States.
Q2. What is CME’s “Federal Reserve Observation”?
A. CME’s “Federal Reserve Observation” is a market-based tool that predicts the probability of the Federal Reserve’s interest rate decision.
Q3. What is the probability of an interest rate increase in May 2021?
A. The probability of a 25 basis point interest rate increase by May 2021 is 37.6%.