On July 29th, the Fed’s Federal Open Market Committee (FOMC) voted to maintain interest rates steady at 3.50 to 3.75% on a 9-3 vote, with regional bank presidents Hammack, Kashkari and Logan dissenting in favor of a hike. Despite the dissent, Chairman Kevin Warsh pointedly gave no explicit forward guidance, forcing traders to look elsewhere for clarity: prediction markets.
Money Talks
In the last two years, prediction markets have exploded. Monthly trading volume has gone from under $5 billion a month in September 2025 to $44.8 billion in June 2026. Earlier in the year, Kalshi partnered with Nasdaq, and Polymarket with Dow Jones. Intercontinental Exchange, parent company of the New York Stock Exchange, has committed a full $2 billion and completed it with a $600 million tranche in March 2026 to Polymarket.
Prediction markets span the disparate worlds of sports, politics, and even war. While there have been several scandals regarding traders profiting from insider information, the industry is clearly favored by the current administration and is only gaining traction and liquidity.
President Trump’s media company, Trump Media & Technology Group, is developing its own prediction market, TruthPredict, which will focus on major events. Meanwhile, President Trump’s eldest son, Don Jr., has financial ties to both Kalshi and Polymarket.
Chicago vs. the Herd
The Chicago Mercantile Exchange Holdings Inc., commonly known as CME, is the world’s largest derivatives and commodities marketplace. The CME FedWatch, originating in 2013, acts as an indicator of probable changes to the Fed rate, implied by the 30-Day Fed Funds futures prices.
Traders invest tens to hundreds of billions in the 30-Day Fed Funds futures to hedge short-term interest rate risk. This massive liquidity acts as a barometer for market sentiment and traditionally has served as a complementary resource to the forward guidance provided by the Fed.
Now, with Chairman Warsh’s refusal to provide forward guidance, the CME FedWatch has taken on an outsized role. However, the CME FedWatch isn’t the only game in town.
While the FedWatch represents liquidity that dwarfs the money in prediction markets, the CME FedWatch doesn’t adjust in real time to current events like prediction markets can. Moreover, disregarding real-time changes, the probabilities presented by prediction markets and the CME FedWatch are never the same.
The divergence of percentages has given traders something more to think about. The CME FedWatch derives its numbers from hedge investments made predominantly by institutions, whereas prediction market percentages are based solely on a binary bet that the Fed rate will change or not, with the pool of money coming from retail traders and whale investors.
Everybody’s Number Has a Motive
Biases held by institutional hedge investments show up in the CME FedWatch numbers, whereas biases are also present in prediction markets. Emotion-driven retail traders can sway percentages, while deep-pocketed whales can purposefully go against consensus thinking to shape public narratives.
Chairman Warsh has said combatting inflation is his priority. But given the lack of a change in rates after the Fed’s July meeting, some have questioned if there are other considerations in play. Warsh’s reticence has opened the door for the CME and prediction markets to control the narrative, at least until the next Fed meeting.
The Ground Keeps Moving
Although Chairman Warsh has refused to explain his rationale for Fed policy, other Fed officials have gone on the record to explain why a rate hike is necessary to combat inflation. Given these public statements and lingering inflation, the probability of a rate hike had climbed past a coin flip in early August.
Then, after the release of a weaker-than-expected July jobs report, the probability of a rate hike drastically decreased. With signs of the economy slowing, prognosticators see rates staying where they are, although there are discrepancies. While Kalshi holds a 65% chance that rates will go unchanged, the CME FedWatch stands at 55%, much closer to a coin toss.
Following the jobs report, on Wednesday, August 12, the Consumer Price Index (CPI) was released. The report shows little fluctuation in inflation, prompting prediction markets and the CME FedWatch to raise a few percentage points in favor of rates remaining unchanged in September.
Reading a Chairman Who Won’t Talk
Despite the weak jobs and tame CPI report, many economists and Fed officials still see a need to raise rates. The volume of public commentary made by Fed officials is notable considering that Chairman Warsh has remained silent.
While prediction markets and the CME FedWatch are repricing percentages based on new data inputs, no one knows how any of this information will be interpreted by Warsh. Debate continues regarding what data should represent inflation and what shouldn’t. Moreover, there is significant debate over what the root cause of current inflation.
Some have argued that inflation has remained sticky solely due to energy shocks and will soon subside. Others, like the National Economic Council Director, Kevin Hassett, argue that inflation is caused by supply-side issues and will not be fixed by rate increases.
What the Fed’s FOMC collectively thinks will remain a mystery until they meet again in September. What’s clearer is that prediction markets have proven to be as accurate as the experts. Wednesday’s inflation data showed little change between June and July. That shouldn’t be surprising. Traders on Kalshi predicted it.
For two decades, the Fed told markets roughly where it was going, and markets priced the rest. Warsh has ended that arrangement. A Fed chair who refuses to explain himself has handed the job of interpreting his intentions to markets that will happily take it. Until Warsh speaks, or until September tells us what he was thinking, the odds are the only guidance anyone has.
Author: Tim Tolka, Senior Reporter
The editorial team at #DisruptionBanking has taken all precautions to ensure that no persons or organizations have been adversely affected or offered any sort of financial advice in this article. This article is most definitely not financial advice.
See Also:
Why Did Kevin Warsh Shock Markets on Rate Cuts? | Disruption Banking
Warsh’s First Day at the Fed: Can Regime Change Beat 3.8% Inflation? | Disruption Banking
