CME FedWatch Indicates Fed May Rate Cut Probability Drops to 17.2%

As of April 10, 2025, the CME FedWatch Tool indicates a mere 17.2% probability of the U.S. Federal Reserve cutting interest rates by 25 basis points (bps) at its May meeting, while the likelihood of maintaining the current rate remains significantly higher at 82.8%. This data reflects a shift in market sentiment following a series of economic and political developments.

The Federal Reserve initiated a rate-cutting cycle in 2024, reducing rates by a total of 100 basis points across three meetings. This included a 50 bps cut in September, followed by two 25 bps reductions in November and December, bringing the current target range to 4.25%-4.50%.

In 2025, the Federal Reserve faced mounting pressure from President Trump to further reduce rates to alleviate economic strain. Trump repeatedly urged the central bank to act, particularly as his aggressive reciprocal tariff policies created market turmoil. On April 7, he took to his Truth Social platform to label the Fed "slow to act" and demanded immediate rate cuts.

The market's reaction was swift. On April 8, the U.S. stock market's fear gauge, the VIX, surged to a 4.5-year high, and CME data showed the probability of a 25 bps rate cut in May climbing to 44.49%.

However, Federal Reserve officials remained cautious. Minneapolis Fed President Neel Kashkari stated on April 9 that tariffs had raised the threshold for altering interest rates, even if the economy showed signs of deterioration. "The hurdle to change the federal funds rate one way or the other has increased due to the tariffs," Kashkari noted.

Later that day, Trump announced a 90-day "pause" on tariffs for 75 countries, reducing the rate to a uniform 10% during this period. This move led to a significant recovery in U.S. equities and sharply reduced market expectations for a May rate cut. By April 10, the CME FedWatch Tool reflected a 17.8% chance of a rate reduction, with an 82.2% likelihood of rates remaining unchanged.

The CME FedWatch Tool calculates market expectations for Federal Reserve rate decisions by analyzing the prices of federal funds futures contracts. These contracts settle based on the average federal funds rate for a given month. By comparing current futures prices with theoretical prices under different rate scenarios, the tool estimates the probability of specific rate decisions at future Federal Open Market Committee (FOMC) meetings. For example, if a futures contract's price suggests an expected rate of 4.75% while the current rate is 5%, the tool can calculate the market's expected probability of a 25 bps rate cut.

As the May meeting approaches, the Federal Reserve appears to be holding firm on its forecast of two rate cuts in 2025, despite political pressure and market volatility. Chair Jerome Powell’s recent remarks emphasized the Fed's cautious approach, signaling no immediate deviation from its planned course.