A trader has two screens open. On one, a prediction market contract asks whether the Federal Reserve will cut rates by 25 basis points at its next meeting. On the other, the CME FedWatch tool shows a percentage for the same outcome. The two numbers are often close and rarely identical, and the reason is that they come from different instruments built in different ways.
One is a contract on a specific decision, settled against the Fed's own announcement. The other is a calculation from the prices of interest rate futures. Both are useful. They are not the same instrument.
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What a Fed rate contract actually asks
Kalshi's Fed decision series (KXFEDDECISION) lists five contracts for each scheduled meeting: a cut of more than 25bps, a cut of 25bps, a "hike" of 0bps (the hold), a hike of 25bps and a hike of more than 25bps. Each is a separate binary contract, and Kalshi's rules say the outcomes are mutually exclusive: at most one can resolve Yes. If the Fed cuts by 25bps on the meeting date, the 25bps cut contract resolves Yes. Kalshi's own example: a 50-basis-point hike resolves the contract for a hike above 25bps Yes and the 25bps hike contract No.
Polymarket's Fed decision markets work on the same idea with their own wording: a cut of 50 or more basis points, a cut of 25, no change, an increase of 25, or an increase of 50 or more. Polymarket measures the decision by the change in the upper bound of the target federal funds range. If the Fed moves by an amount that is not one of the listed options, the change is rounded up to the nearest 25 basis points and resolves the matching bracket, so a 12.5bps move counts as 25bps. The resolution source is the FOMC's statement after the scheduled meeting, and the rules also point to the Fed's open market page, where the level and change of the target rate are published.
The contract is binary and the event is discrete. There is no "close" or "nearly". The decision is announced, one bracket resolves Yes, and the rest resolve No.
Where the market price comes from
If the Fed is going to do exactly one thing, why do several outcomes trade above zero at the same time? Because nobody knows the answer yet. Traders buy and sell Yes and No shares, and the price of a Yes share, quoted in cents, reads as the market's implied probability of that outcome: a price of so many cents reads as roughly that many percent. Across the five outcomes for one meeting, the Yes prices should add up to about 100 cents, give or take the spread. Our guide to how prediction market odds work covers the arithmetic in full.
How CME FedWatch gets to its number
FedWatch takes a different route. According to CME's own description of its methodology, the tool calculates its probabilities from the prices of 30-Day Federal Funds futures. Each contract's price reflects the market's expectation of the average daily effective federal funds rate (the EFFR) during that contract's month, and the implied average rate is 100 minus the futures price.
In a month with an FOMC meeting, that monthly average is a blend of the rate before the meeting and the rate after it, weighted by the number of days on each side. CME's method works out the rate at the start and end of the meeting month, takes the expected change, and divides it by 25 basis points. The result is split into whole moves and a remainder, which gives the probability of each of two neighbouring outcomes. The calculation assumes the Fed moves in multiples of 25 basis points and that the effective rate moves in proportion, and CME describes the results as estimates based on those assumptions. Repeated meeting by meeting, the same steps build a tree of probabilities for later meetings too.
So a Kalshi or Polymarket contract asks the question and resolves on the answer, while FedWatch works the answer backwards from futures prices under a set of stated assumptions.
Why the two numbers can differ
Two numbers for the same event can differ for reasons that come straight from how each is made. FedWatch reads the effective federal funds rate, a daily average, and turns an expected change in that average into probabilities by assuming moves of exactly 25 basis points. A prediction market contract settles on the announced change in the target range itself, and its price is whatever traders on that venue are willing to pay. Each price also reflects only the people trading on that venue. Where the two numbers differ, the gap is worth noticing, but neither number is the answer until the Fed announces its decision.
There is also a difference in what you see. FedWatch shows one probability per outcome. Kalshi and Polymarket show a bid and an ask for each contract, and the figure most people quote is the midpoint. When the spread between bid and ask is wide, the price you see can be some way from the price you could actually trade at. Our guide to spotting mispriced prediction markets covers how traders think about gaps like these, and why costs often eat the apparent edge.
What the contract does not cover
Each venue has a rule for a meeting that does not happen. Kalshi's rules say that if the scheduled FOMC meeting is cancelled and does not occur on its scheduled date, "Fed maintains rate" resolves Yes and all other outcomes resolve No. Polymarket's rules say that if no statement is released by the end date of the next scheduled meeting, the market resolves to the "No change" bracket.
A contract on one meeting is a narrow instrument. It says nothing about what the Fed does at the meetings after it. FedWatch, by building its tree meeting by meeting, gives probabilities further out as well. For a clean read on the next decision on its own, the contract asks exactly that question.
The event-contract framing
These Fed decision contracts are what US regulation calls event contracts: a contract that pays a fixed amount if a specified event occurs and nothing otherwise. Our explainer on what event contracts are covers the framing in depth. Kalshi's Fed decision markets are listed on a CFTC-regulated designated contract market: the CFTC's list of designated contract markets shows Kalshi as designated on 3 November 2020. How Polymarket's markets are regulated depends on which of its platforms a trader uses, which our guide to whether Polymarket is legal in the US walks through.
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The takeaway
A Fed rate prediction market and FedWatch answer the same question from two directions. One prices the decision directly through contracts that settle on the Fed's announcement. The other calculates probabilities from futures prices under stated assumptions. Reading both, and knowing how each is made, tells you more than either number alone.
Frequently asked questions
What is a Fed rate prediction market?
A Fed rate prediction market is a set of binary contracts on what the Federal Reserve decides at a scheduled FOMC meeting. On Kalshi's KXFEDDECISION series and on Polymarket's Fed decision markets, each meeting has five outcomes covering cuts, a hold and hikes in 25 basis point steps, and at most one resolves Yes. The Yes price on each outcome, quoted in cents, is read as the market's implied probability. Kalshi resolves on the Fed's action on the meeting date; Polymarket resolves on the FOMC's statement after the meeting, measured by the change in the upper bound of the target range.
How is CME FedWatch different from a prediction market contract?
FedWatch calculates probabilities from the prices of 30-Day Federal Funds futures, while a prediction market contract asks the question directly and settles on the Fed's decision. According to CME's description of its method, each futures price implies an average effective federal funds rate for its month, and the tool works out the expected change across a meeting month, assuming the Fed moves in multiples of 25 basis points. A Kalshi or Polymarket contract infers nothing: a trader buys Yes or No on a specific outcome and is paid if that outcome happens.
Why do the two numbers differ if they are about the same event?
They are made differently. FedWatch turns futures prices into probabilities through a calculation with stated assumptions, including moves in exact multiples of 25 basis points, and reads the effective rate rather than the target range itself. A prediction market price is what traders on that venue are willing to pay for a contract that settles on the announced decision. Each number reflects its own inputs, so they can sit apart, and neither is the answer until the Fed announces its decision.
What happens to the contract if the FOMC meeting is cancelled?
Both venues have a rule for it. Kalshi's rules say that if the scheduled FOMC meeting is cancelled and does not occur on its scheduled date, "Fed maintains rate" resolves Yes and all other outcomes resolve No. Polymarket's rules say that if no statement is released by the end date of the next scheduled meeting, the market resolves to the "No change" bracket. The published rules on each venue's market page are the binding text, and a trader holding a position into a meeting should read them directly.