How Fed and CPI prediction markets work

Economic markets are the most scheduled markets there are. The Federal Reserve announces its meeting dates a year ahead. The Bureau of Labor Statistics publishes its release calendar. That gives these contracts a rhythm no other desk has: the question is fixed, the answer arrives at a known minute, and everything in between is the market changing its mind.

Fed decision contracts

A Fed decision market is a set of contracts for one meeting: no change, a cut of 25 basis points, a cut of 50 or more, a hike of 25, a hike of more. Each is its own contract, so the set reads as a probability distribution across outcomes. On a normal day the prices sum to roughly 100, and when they do not, the gap is spread and stale quotes, not riskless profit.

The rule is usually precise: the contract settles YES if the Fed announces that specific change to the target range at that specific meeting. A "cut" contract does not pay if the cut comes at the next meeting, and it does not pay on an emergency move between meetings unless the rule says so. Read it.

What moves the price: the inflation and jobs releases before the meeting, Fed officials' public remarks during the weeks they are allowed to speak, and the market's own reading of financial conditions. In the final week before a meeting the Fed goes quiet, and the market's last look at the data is what it settles its mind on.

An outside model to compare against: the CME FedWatch tool derives probabilities from interest-rate futures. When it and the prediction market disagree by more than a few points, one of them has a stale quote or the two are reading a different question, such as a different meeting or a different definition of a cut. We label it as an external model when we cite it.

CPI ladder contracts

A CPI market is a ladder of thresholds on the year-over-year inflation rate in the next report: above 2.5%, above 2.6%, and so on up to above 5%. Each rung settles YES if the published figure exceeds that threshold. Because the rungs are nested, they must decline in price as the threshold rises, and a ladder where "above 3.3%" trades higher than "above 3.2%" is a mispricing to be arbitraged, not a forecast to be read.

The rung nearest 50 is the market's median expectation for the print. Our CPI tracker shows that rung as the headline and the whole ladder as a table. Read the ladder as a distribution: where the price drops steeply is where the market thinks the number will land.

Settlement: the BLS number, as published at 8:30 a.m. Eastern on the release date. Rules specify which series (headline versus core, seasonally adjusted or not) and how many decimals are compared. A rule that reads "above 3.3%" against a print of exactly 3.3% settles NO; the threshold is strict.

Revisions: CPI is rarely revised, but jobs numbers are revised twice. Payroll contract rules usually name the first print as the one that settles. Do not assume; read the rule on the contract.

A worked example

Ten days before a Fed meeting, the hold contract shows 45, hike 25 shows 56, cut shows 1. That is a market leaning toward a hike after a hot inflation print. A CPI release lands two days later at a number above the median rung. The hike contract moves to 65 and the hold to 34. Nothing about the meeting has changed; the market's estimate of what the committee will do has. On the meeting day at 2:00 p.m. Eastern one contract goes to 100 and the rest to 0, and that is settlement.

Where the dates come from

• Federal Reserve meeting calendar: federalreserve.gov.
• CPI, jobs, and other release dates: bls.gov schedule.

Our catalyst calendar carries both, and the trackers name the next date on each page.

What to take away

• A Fed market is a distribution across outcomes for one meeting; a cut at the next meeting does not pay this contract.
• A CPI ladder must decline as thresholds rise; the rung near 50 is the median.
• Thresholds are strict and the settling series is named in the rule.
• FedWatch is an external model; the prediction market is market-implied; label them.