What the Federal Reserve is going to do next is a common topic of conversation among economists and investors. Will interest rates be cut further? How much should the Fed cut rates? Is the Fed downplaying the threat of inflation too much?

It is very easy to find armchair quarterbacks with their own views on what monetary policy should be. Many of them share their opinions with confidence even though their own crystal balls are cracked.

Rather than rely on forecasts, I keep an eye on the CME FedWatch Tool. This shows the implied interest rates being priced into federal funds futures. It is a real-time indicator of what traders perceive to be the direction of interest rate changes. Unlike forecasts, the FedWatch Tool is based on actual transactions within the futures market.

A challenge with monitoring the futures market is that the odds priced in are constantly subject to change, even when the next Federal Open Market Committee (FOMC) meeting is just a few weeks away. Furthermore, the inaccuracy of forecasts increases with time. A meteorologist can give you a good probability of whether it will rain tomorrow, but they can’t tell you what the weather will be on a given day in November 2026.

Rather than speculating on what the FOMC might do, you could opt to simply follow it. This is in line with the longstanding mantra of “don’t fight the Fed.”

Robert Johnson and Gerald Jensen’s research has found that following the Fed’s actions has long been a profitable strategy for investors. They define following the Fed as paying attention to what changes are being made to both the average monthly effective federal funds rate and the discount window primary credit rate (aka the discount rate). Both rates can be found on economic websites like the St. Louis Federal Reserve’s FRED database.

When both rates are being lowered, as was the case as we went to press, monetary policy is expansive. Expansive monetary policy is good for stocks, with small-cap stocks particularly benefiting. Read Johnson and Jensen’s article here.

Wishing you prosperity and good health,