Prediction Markets Don't Believe The Fed

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To investors,

The market continues to work overtime trying to figure out the Federal Reserve’s plan to cut interest rates. Optimism ruled the day as we entered 2024, including a belief that we would have majority of the Fed’s interest rate decisions lead to rate cuts before the year ended. Today the sentiment is very different.

Rather than opine on the qualitative feelings of the market, we can look to the Kalshi prediction market for a quantitative read on how people are thinking about what should unfold related to interest rates.

According to these prediction markets, we were set for 5 interest rate cuts in January, but that number has now fallen to under 2.

Quite a fall in expectations in just 5 months. You can see that the most popular prediction now is a single rate cut in 2024.

At the start of the year, the market predicted an interest rate cut by July was more than 90% likely. Today that percentage has fallen to 27%.

These same markets think there is a 92% chance of no change to interest rates in the next meeting, but an 8% chance to cut at least 25 basis points and a 2% chance of a cut larger than 25 basis points.

What about the crowd that thinks there is going to be another increase in the interest rate, rather than cuts on the horizon? Those people are in the minority according to prediction markets. If you wager $100,000 on an interest rate hike happening before the end of 2024, you stand to make ~$566,000 if you are correct.

Finally, the prediction markets believe there is a 37% chance that we will see an interest rate below 5.25% this year, while there is a 33% chance below 5% interest rate and an 11% chance we see lower than 4.75%.

Most people don’t think in terms of probabilities. However, it can be one of the best ways to navigate complex, unknown scenarios. These prediction markets are not crystal balls, but rather can show you a quantifiable measurement on how sentiment and market expectations is changing in real-time.

I will keep seeking information on my journey to learn. Hopefully you find this valuable. Have a great weekend and I’ll talk to everyone on Monday.

-Anthony Pompliano

Hannah Maruyama is the Founder of Degree Free.

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