Fed Watch, dot plot and minutes - how to read the Fed

The Fed does not trade. The Fed manages expectations. If you understand how the market prices future rates, you will stop guessing what Powell will do and start measuring.

In this lesson you will learn to translate Fed language into positioning: what FedWatch is, how to read the dot plot, what is really in the minutes, and how all of it connects to your trading plan. No politics. Only the mechanics of expectations.

Why the Fed is the most important variable for a trader

Even if you do not trade USD, you trade the Fed. Why?

1. The dollar is the world’s reserve currency. The cost of the dollar = the cost of global liquidity.
2. US yields (US10Y) are the benchmark for every asset. If US10Y rises, capital flows out of risky assets globally.
3. 70% of the move in the SPX / NAS100 indices in FOMC weeks is a change in rate expectations, not company results.

You do not have to love macro. You have to understand that:

The price of an asset today = future cash flows discounted at the Fed rate

When rate expectations rise → the discount rate rises → the valuation falls (especially tech).

The FedWatch Tool - your X-ray of expectations

The CME FedWatch Tool shows what probability the market assigns to the next FOMC decision, based on Fed Funds Futures contracts.

How to read it

Go to cmegroup.com/trading/interest-rates/countdown-to-fomc

You will see a table:

That means the market prices an 85% chance of a 25bp cut.

Rules of interpretation:

1. >80% = the market is certain. The decision itself will not move the market. What moves it is what they say afterwards.
2. 50-80% = the market is uncertain. Every comment from a Fed member moves the market. High volatility.
3. A change of 10% within a day after data = significant. If after CPI the probability of a cut jumped from 60% to 85%, you have a driver for risk-on for 48h.

The formula you have to know:

If Actual CPI > Forecast, then P(cut next month) falls -> USD strengthens, SPX falls
If Actual CPI < Forecast, then P(cut) rises -> USD weakens, SPX rises

This is not advice. This is the mechanics of pricing rate futures.

The dot plot - where Fed members really are

Every quarter the Fed publishes the Summary of Economic Projections (SEP), and inside it the dot plot. It is dots.

Each dot is one FOMC member’s anonymous forecast of the rate level at the end of the year.

How to read the dot plot in 30 seconds

       6.0%  o
       5.5%  o o o
       5.0%  o o o o o o o  <- median
       4.5%  o o o o

1. Find the median (the middle dot). That is the Fed’s official message.
2. Count the dispersion. If the dots are spread from 3.5% to 5.5%, the Fed has no idea what it will do. It is waiting for data. Volatility will be high.
3. Compare the median with the market pricing from FedWatch. If the Fed says 4.5% at the end of the year and the market prices 3.5%, someone is wrong. Usually the market has to adjust to the Fed (a strong move).

Minutes and the press conference - where the real information is

The decision is the headline. The real value is the minutes (published 3 weeks after the FOMC) and Powell’s press conference.

The Fed dictionary (you have to know it):

In the minutes look for 3 things:

1. How many people talk about the risk of higher inflation versus recession?
2. Do they discuss slowing QT (quantitative easing)?
3. Does the word “pause” or “cut” appear?

One sentence in the minutes can reverse a trend for a week.

The FOMC process model - a checklist

D -7 days: Blackout period. Fed members cannot speak. The market positions itself in silence.
FOMC day 20:00 CET: Decision + SEP + Dot Plot
20:30 CET: Powell's press conference - 80% of the volatility is here
D+21 days: Minutes - verification of what Powell said

The trader’s plan:

• T-1 day: Check FedWatch. Write down the probabilities. What is the consensus?
• FOMC day until 19:30: ZERO new positions on USD, SPX, Gold. Cut risk to 0.25R.
• 20:00-20:30: You do not click. You listen. You write down key words.
• 20:30-22:00: You wait for the first impulse and its negation. Only after the press conference do you assess.
• D+1: Trade in line with the new expectations regime, not against it.

When the plan says do not trade

1. Dot Plot versus Market inconsistency > 50bp. If the Fed says 5%, the market 4%, and you do not know who is right - that is not a moment for leverage. It is a moment to observe who adjusts first.
2. Powell’s press conference in progress. The spread on XAUUSD can jump from 30 to 200 cents. A guaranteed SL stops being guaranteed. Wait for the transcript.
3. FED SPEAKER CLUSTER - 3 Fed member speeches on the same day. Each of them says something different. The market whips both ways. That is a day for a backtest, not for live.
4. A change of narrative during the session. At 14:00 a dovish CPI, at 19:00 a hawkish Fed member says one CPI changes nothing. If the narrative changes intraday, your morning plan is out of date. Exit to cash.

Mistakes that cost the most

Measurable exercise

Task: a Fed journal for 1 FOMC cycle (6 weeks)

1. Set up a spreadsheet: Date, Event (CPI/NFP/Fed Speaker), FedWatch P(cut) at the next meeting before and after, SPX close, DXY close.
2. Every day at 17:00 write down FedWatch for the next meeting.
3. After every Tier 1 data release write down by what % P(cut) changed.
4. Calculate the correlation: does a rise in P(cut) correlate with a rise in SPX on your days?

The formula in the spreadsheet:

Change in P = P_after_data - P_before_data
SPX reaction = (SPX close after - SPX close before) / SPX close before * 100%

After 1 cycle you will know empirically: how many SPX points +10% in the chance of a cut gives in the current regime. That is your measurement edge.

Check yourself

1. FedWatch shows 90% for holding rates. What will move the market on FOMC day? a) The hold decision itself b) The dot plot, SEP and Powell’s press conference c) Nothing, because everything is known

Correct: b) At 90% the decision is priced. The narrative about the future moves the market.

2. The dot plot median at the end of the year is 4.6%, and the market prices 3.9%. What is the regime? a) Dovish, the market expects more cuts than the Fed b) Hawkish, the Fed is more restrictive than the market, risk of a risk-on correction c) Neutral

Correct: b) A 70bp gap is a large divergence. If the Fed does not come down, the market has to adjust upwards through yields.

3. In the minutes you see: “Most participants noted upside risks to inflation”. That is: a) Dovish b) Hawkish c) Neutral

Correct: b) “Most” = strong consensus + “upside risks” = concern about inflation = higher rates for longer.

Frequently asked questions

Q: Do I have to watch every speech by a Fed member? A: No. Watch only the voters in a given year and Powell, Williams, Waller. The rest is noise. Subscribe to a Fed speaker calendar and filter for voters.

Q: What matters more - rates or QT? A: Both are liquidity tools. Rates are the price of money, QT/QE is the quantity of money. In 2022-2024 slowing QT had a bigger effect on SPX than one hike. That is why in the minutes you look for the Fed’s balance sheet.

Q: Is FedWatch always accurate? A: No. FedWatch is market pricing, not a prophecy. It tends to overestimate the number of cuts. That is why when FedWatch shows 6 cuts and the dot plot 3, assume the scenario that the truth is closer to the dot plot.

Q: Can I trade SPX on the Fed alone? A: No. The Fed is one of 3 engines: Fed + earnings + positioning. The Fed alone without technical context and correlation is not enough. Use it as a regime filter, not as an entry signal.

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