Fed Funds Futures

DEFINITION of 'Fed Funds Futures'

Fed funds futures are financial contracts that represent market opinion of where the daily official fed funds rate will be at the time of the contract expiry. The futures contracts are traded on the Chicago Mercantile Exchange (CME) and are cash settled on the last business day of every month. Fed fund futures can be traded for every month as far out as 36 months. 

BREAKING DOWN 'Fed Funds Futures'

Fed funds futures are used by banks and fixed-income portfolio managers to hedge against fluctuations in the short-term interest rate market. They are also a common tool traders use to take speculative positions on future Federal Reserve monetary policy. The CME group has created a tool that uses fed funds futures contracts to determine the probability of the Federal Reserve changing monetary policy at a particular meeting, which has become a useful tool in financial reporting. 

The price of the contract is quoted by subtracting the implied interest rate from 100. For example, if the implied fed funds futures rate for a particular date is 2.5 percent, the contract price is 97.50. So as interest rates rise, the price of the contract falls.