TL;DR. A Fed funds futures contract is a bet on the average overnight federal funds rate for one calendar month. The price is quoted as 100 minus the implied rate, so 96.25 means the market expects the effective rate to average 3.75% that month. Divide contract prices around FOMC meeting dates and you can back out the market-implied probability of a hike, hold, or cut — which is exactly what the widely-cited CME FedWatch Tool publishes.
The contract, in one paragraph
CME lists a 30-day Federal Funds futures contract, ticker ZQ. Each contract is a $5,000,000 notional bet on the arithmetic average of the daily effective federal funds rate (EFFR) for the delivery month. EFFR is the volume-weighted median rate at which depository institutions actually lend reserves overnight; the New York Fed publishes it every business day. Contracts trade for 60+ consecutive delivery months, so you can see market pricing years into the future — although liquidity thins out quickly beyond the next four or five FOMC meetings.
Because EFFR is an overnight rate and the contract references a monthly average, the whole business becomes an arithmetic exercise once you know the FOMC calendar and today’s rate.
Contract specifications at a glance
| Specification | Value |
|---|---|
| Ticker | ZQ (CME/CBOT) |
| Contract size (notional) | $5,000,000 |
| Price quotation | 100 minus the implied monthly average EFFR |
| Minimum tick | 0.25 basis points = $10.4175 per contract |
| Value of one full basis point | $41.67 per contract |
| Settlement | Cash-settled to the arithmetic average of daily EFFR for the delivery month |
| Last trading day | Last business day of the delivery month |
| Listed months | 60 consecutive calendar months |
Two contract quirks matter for the rest of this article. First, the $41.67 basis-point value comes from applying one basis point of interest to $5 million for one month: $5,000,000 × 0.0001 × (30/360) = $41.67. Second, because settlement is a monthly average, a single contract can span more than one FOMC decision — the market has to split the probability weight across every day of the month.
The pricing formula: 100 minus the rate
The core identity is simple: ZQ price = 100 − implied average EFFR (%). If the October 2026 contract trades at 96.35, the market expects EFFR to average 3.65% during October. If a cut is priced in mid-month, the average will be somewhere between the current rate and the post-cut rate — weighted by how many days the rate spends at each level.
Worked example. Suppose today is early September 2026 and the Fed’s target range is 3.50%–3.75%, with EFFR printing near 3.65%. The next FOMC meeting is September 15–16, and the market is trying to guess whether the Fed will cut 25 basis points to 3.25%–3.50% (new EFFR near 3.40%) or hold.
Assume the September ZQ contract trades at 96.44. The implied average is 100 − 96.44 = 3.56%. Given 30 days in September, roughly 16 days at the pre-meeting rate (3.65%) and 14 days at the post-meeting rate, the market is implicitly assigning a probability p to a cut such that:
3.56 = (16/30) × 3.65 + (14/30) × [p × 3.40 + (1−p) × 3.65]
Solving: the day-weighted post-meeting rate must be about 3.463%, so p × 3.40 + (1−p) × 3.65 = 3.463, which gives p ≈ 0.75. In other words, that ZQ price implies roughly a 75% probability of a September cut. That is exactly the arithmetic behind the CME FedWatch Tool’s headline numbers.
How CME FedWatch turns prices into probabilities
The same trick extends to later contracts. The October contract has no partial-month split — it spans a full calendar month with (usually) no meeting inside it — so its price directly implies the post-September rate. Combining the September and October ZQ contracts pins both the September cut probability and the level the Fed is expected to sit at afterward. Layer in November, December, and so on, and you have a market-implied forward path for the entire policy rate.
A worked example against real Fed history
The 2022–2024 cycle is a clean case study of what the market got right and where it was slow. From March 2022 through July 2023, the FOMC raised the target range eleven times, from 0.00%–0.25% up to 5.25%–5.50%. Then it held for over a year before pivoting to cuts. Below are the last six moves before the current pause, per the Fed’s open market operations record:
| Meeting | Decision | New target range | Change (bp) |
|---|---|---|---|
| March 22, 2023 | Hike | 4.75% – 5.00% | +25 |
| May 3, 2023 | Hike | 5.00% – 5.25% | +25 |
| July 26, 2023 | Hike | 5.25% – 5.50% | +25 |
| September 18, 2024 | Cut | 4.75% – 5.00% | −50 |
| November 7, 2024 | Cut | 4.50% – 4.75% | −25 |
| December 18, 2024 | Cut | 4.25% – 4.50% | −25 |
Two lessons come out of that history. In the meeting immediately ahead, ZQ prices tend to be very accurate — the market has usually converged to nearly full pricing of the decision by the morning of the meeting, and the FOMC rarely surprises within a two-week window. But four or five meetings out, the ZQ strip has repeatedly under- and over-predicted the pace of moves; the entire 2022 curve, for instance, priced hikes that were far too shallow relative to what actually happened. A forward is a forecast, not a promise.
How the current curve looks going into September
Common mistakes when reading the curve
Confusing average with instantaneous rate. Because a ZQ contract references the monthly average of EFFR, a mid-month FOMC decision produces a “blended” implied rate that is neither the pre- nor post-meeting level. Traders who back out an implied rate and stop there will misread the market’s actual view.
Ignoring the EFFR-to-target spread. EFFR is not the target rate; it is where the market actually trades, and typically prints a few basis points inside the target range (recently near the mid-point). When comparing a ZQ-implied rate to the Fed’s target, you have to net out this small spread — otherwise you will systematically double-count moves.
Treating far-dated probabilities as forecasts. A contract two years out prices the whole distribution of outcomes; it is not a single-point prediction. If the market thinks there is a 30% chance of an emergency 200bp cut and a 70% chance of holding, the implied rate looks like a modest cut — even though “a modest cut” is not what anyone actually expects.
Assuming FedWatch probabilities are unbiased. Fed funds futures carry a small term premium and can be pushed around by hedging flows, so implied probabilities are not pure objective forecasts. Federal Reserve research — including a New York Fed staff report on the accuracy of fed funds futures — documents that correcting for these biases matters when evaluating predictability.
What to read next
- How Treasury Auctions Work — the other side of the short-rate market.
- QE vs QT: The Fed Balance Sheet Explained — because rate policy is only one lever.
- What Is Jackson Hole? — how forward guidance repriced ZQ contracts intraday.
- Yield Curve Inversion — ZQ-implied cuts often show up first at the short end.
Sources
- CME Group — 30-Day Federal Funds Futures contract specifications
- CME Group — CME FedWatch Tool
- CME Group — Introduction to Fed Fund Futures
- Federal Reserve Bank of New York — Effective Federal Funds Rate
- Federal Reserve — Open Market Operations (target rate history)
- Federal Reserve — FOMC Meeting Calendars
- Federal Reserve — FOMC Minutes, July 2026
- Federal Reserve Bank of New York — Staff Report 491: FOMC Communication Policy and the Accuracy of Fed Funds Futures
Disclosure: This article is for informational purposes only and is not investment advice.