Will the Fed decide differently in the next three decisions (Jul–Sep–Oct)?
Alpha Opportunity
Alpha Thesis
Our AI estimates a true probability of 18.0% vs the market's 50.0%, identifying a 32.0% edge on the NO side. Historically, the Fed has shown a tendency to maintain rates over consecutive meetings unless significant economic changes occur. The base rate for a change in decision pattern over three meetings is relatively low. Current economic indicators show mixed signals with inflation still a concern but some signs of economic slowdown. Fed statements suggest a cautious approach, with a potential for maintaining or slightly adjusting rates rather than significant changes.
📐Key Metrics
Key Findings
- Historical Fed decision patterns — Historically, the Fed has shown a tendency to maintain rates over consecutive meetings unless significant economic changes occur. The base rate for a change in decision pattern over three meetings is relatively low.
- Current economic indicators and Fed statements — Current economic indicators show mixed signals with inflation still a concern but some signs of economic slowdown. Fed statements suggest a cautious approach, with a potential for maintaining or slightly adjusting rates rather than significant changes.
- Probability of different decisions — The probability of a rate hike in July is moderate, but the likelihood of a rate cut in September and maintaining rates in October is lower. Combined probability of different decisions is calculated at 0.06.
- Sequential update with evidence — Starting with a low base rate, the inside view evidence and Fermi decomposition suggest a low likelihood of different decisions across the three meetings. The Bayesian update results in a final probability of 0.18.
- Resolution Criteria — The market resolves to YES if the combination of decisions made in the July, September, and October meetings is different from the previous three meetings. It resolves to NO if the decisions are the same as the previous three meetings. Any rate hike will result in a resolution of 'Other'.
- 10 Sources Analyzed — Including The Fed - Meeting calendars and information, Federal Funds Effective Rate (FEDFUNDS) - FRED, July 2023 Fed Meeting: Interest Rate Hikes Resume
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Alpha Quality Factors
Criteria that determine how exploitable this mispricing is
Human Bias Detected
Cognitive biases creating this alpha opportunity
The market overweights vivid, recent events, making this outcome feel more likely than it actually is.
The crowd may lack specialized knowledge that narrows the true probability range.