The Fed Won't Say Where Rates Are Going, So We Built the Curve Ourselves

Bootstrapping a swap curve from CME SOFR futures after a divided FOMC, and what it says about who's exposed if Warsh moves again on September 16th

I. The Vote that said nothing

The July 29th Federal Reserve meeting, held to expectations. The FOMC held its benchmark rate at 3.50 - 3.75% for its fifth straight meeting, Warsh’s second as chair. However, this meeting was not unanimous with three regional Fed presidents dissenting, arguing for a hike rather than a hold. There is a real split in the institution responsible for the most closely watched interest rate in the world. The statement associated, furthermore proved to be definitely uninformative. This should not come as a surprise, Warsh has warned against forward guidance and is fundamentally reshaping how the Fed talks to markets, with much less handholding. His Fed, is grounded in empirical data, insistent to let it speak for itself when its ready to. True to such sentiment the July statement was shorter than most Fed statements in recent years, with no clear signal on the path ahead. No hint at how the committee is weighing inflationary data against the labor market. Markets reacted to the genuine uncertainty the way markets do. Equities sold off through the afternoon, long end treasury yields rose while the short end slipped, as investors are repricing the distribution of outcomes not simply the base case.

A central bank who lacks forward guidance, makes the future uncertain. However, someone must price what happens at the September meeting, after that every floating-rate obligation, swap book, and hedged loan that resets furthermore. Therefore this piece will attempt to answer such, not by guessing Warsh’s next move, but by building the same forward looking curve the market is already pricing in, from the data. In an attempt to show what is at stake to anyone holding real exposure in what happens at this September FOMC meeting.

II. If the Fed won't forecast, the market already has

Whether central banks are leading the forecasted discussion or not, interest rate uncertainty will still get priced somewhere else. For a valid reason, everyday vast amounts of money change hands depending on where the federal funds rate will be next month, quarter, year. Banks, Corporations, Asset Managers all have real obligations to where rates land, all while someone takes the other side of said exposure. A bank holding a portfolio of floating-rate loans aims to understand how its funding costs will evolve, or a company who just issued floating rate debt, or that of a pension fund managing long liabilities. A defensible view of the path ahead is essential to strategic action. The demand for such, gets funneled into liquid and transparent markets, most explicitly the market for SOFR futures, observed on actual overnight financing rates observed for a future period. Where in, price is set by real money changing hands, as more trading occurs price stops being trader opinions and becomes closer to a continuously updated collective forecast. Therefore, as the Fed drops the ball on forward guidance, the market pulls it back into court through contract pricing, where expiration next month, quarter, or five years has a price and that price implies a rate. Stitched together the futures market already shows a continuously updated path where rates may be headed. This piece will use CME’s own SOFR futures data to construct the curve directly, to answer the question of what those who hold exposure for September’s meeting, means in dollars.

III. Building the curve from CME's own data

The CME Group lists Three Month SOFR futures (ticker SR3), a contract whose price moves inversely with market expectations for average SOFR rates over a specific future three month window. For example a contract trading at 96.18 translates to the market expecting roughly 3.82% rate over that contract’s window (Implied Rate of Contract = 100 - Contract Price.) The number is the forecast. CME’s quote screen as of the morning of August 7th, 2026 tells a clean story within the front months. The nearest contracts, May through December 2026, denote a steady climb from 3.64% to 3.99% as the year closes out, based on today’s traded prices. They are also backed by tangible volume, the September 2026 contract alone traded over 400,000 lots that morning. Further out is where the picture gets more interesting, contracts for 2027 through mid 2031 continue trading but with progressively smaller volume and the curve traced is not a straight line. It dips slightly through 2027 to 2028 where the market is pricing in a small window of relief, before climbing again toward 2029 to 2031. 

Past 2031 the data changes character, with contracts dated beyond December 2031 and showing zero trading volume on the morning the data was pulled, no buyer and seller actually met at a price that day. What’s quoted for those months is the prior settlement price, carried forward because nothing more recent exists. The data is not invalid per se, but it’s a different kind of data. It is a snapshot on where the market last agreed to trade, not a live read on where  it agrees today. The chart accompanying this piece marks that boundary explicitly, a solid blue line for contracts that traded morning of August 7th, a dashed gray line for the stale tail beyond it. To present nine years of futures contracts with equal confidence would misconstrue or overstate what the far end of the curve in reality is reading. The swap priced in the next section corresponds to a September 16th effective date, a part of CME’s quarterly contract cycle and correspondingly the day of the next FOMC meeting. That alignment means every quarterly reset over the swap’s five year life is based on the market’s own real, traded number.

Figure 1: CME SOFR Futures Implied Curve

IV. A swap, priced fairly, for exactly one moment

The instrument in question will be a $10 million receive fixed swap, effective September 16th, with a five-year maturity. The party undertaking this swap position, will be receiving the fixed leg. Perhaps for this example and rate outlook, a corporate treasury with large cash reserves will be enacting this swap. In the tension filled rate environment currently occurring, a corporate treasury’s cash reserves earn a SOFR linked floating rate. Therefore they might enact this hedge simply for earnings and margin visibility, to convert floating income to the guaranteed 4.063% fixed leg. Though much of the article, has been indicating a hawkish trend, of which would negatively impact enacting a fixed receiver swap, the lack of guidance alone could be enough to outweigh margin visibility over earning a higher rate, or perhaps in this scenario, the corporate treasurer is quietly betting a contrarian view against a hawkish path forward.

For the swap cashflows themselves, no principal is actually exchanged, rather the notional amount is simply used structurally when calculating each period's net cash flows. For Period 1, the swap's first cashflow, the period of September 16th to December 16th 2026 or 91 actual days, derives a Day Count Factor of .25278 or 91/360. The forward rate used is direct from CME’s live contract price conversion or (100 - Current Price) / 100, in this case (100 - 96.18) / 100 = 3.82%. The floating leg’s cashflow equates to Notional x Forward Rate x Day Count Fraction or $10,000,000 x 3.82% x .25278 = $96,561. The fixed leg’s cashflow equates to the Notional x Fixed Rate x Day Count Fraction or $10,000,000 x 4.063% x .25278 = $102,714, wherein the net cash flow between the two legs is $102,714 - $96,561 = $6,153. Because this figure won’t actually settle until December 16, three months after the period begins, the net cashflow must be discounted for its present value of September 16th, via the period’s discount factor of .99044 or = 1/ (1+ Forward Rate x Day Count Factor) or =1 / (1+3.82% x .25278). The present value of the net cash flow equates to $6,094 or = $6,153 x .99044. The same sequence then repeats for the remaining 19 quarters, wherein each one pulls its forward rate from its own named CME contract, each discount factor compounding on the one before it, each period’s fixed and floating cash flows computed the same way with that specific period's own day count fraction. Given that the curve climbs over time, as evident from the CME curve visual provided, the positive net cash flow observed in period 1 doesn’t hold forever. Early quarters, when the forward rate is below the fixed threshold of 4.063%, a positive net cash flow is produced or flows to the receiver. Further out, as rates climb past 4.063% the relationship becomes inverse, later periods produce a negative cash flow. After all 20 periods’ present values have been calculated and added up, the total equates to $0.00, due to the fixed rate itself being solved specifically to balance the curve’s lower early years against its higher later years. At the beginning of the swap both sides' value is equal, a swap priced at par.

(Figures shown are rounded for readability; the underlying model uses the fully precise, unrounded rate throughout.)

Figure 2: Trade Inputs

Figure 3: Periods 1 - 20

Figure 4: Par Fixed Rate & NPV

V. Pricing the Next Meeting: Probability, Forecast, and the Cost of Being Wrong

The rate scenarios outlined in Figure 5 do not carry all the same certainty, and said difference is part of this narrative. The September 16th outcomes are derived probabilities for real capital in 30-day Federal Funds futures (ZQ), with each contract settling based on the average daily Effective Federal Funds Rate (EFFR) over its contract month. Since FOMC meetings occur mid month, that month’s futures price reflects an average rate across the whole month. Part of that month there is a known rate, for days preceding the FOMC meeting, and an unknown rate for the days following. The probabilities are solved backward from the traded price for the implied post-meeting rate, which reconciles the two halves and produces an actual probability. The split is consistent with where real money has already priced the contract. As of August 7th, that equates to a hold weighted at 58.1% and a hike at 41.9%.

Beyond that one data point, for our FOMC scenario based testing of the swap’s NPV, the market’s anchor disappears. Bank of America’s call for three hikes by year end (+75bp) isn’t a probability but a forecast, with no percentage attached. The downside case (-50bp) is not a competing forecast, as no major bank is currently calling for a 2026 cut at all; there is no probability to source from. The downside stress test is included purely as an indicator of an alternative case. That split of quantified uncertainty and unquantifiable uncertainty isn’t a gap in the analysis but a consequence of Warsh’s approach. The market can only produce a real probability where positioning concentrates on one dated event with a small number of realistic outcomes. The DV01 or (+1bp shock) included in the table is not a scenario, but rather a sensitivity analysis of the swap’s delta equivalent. 

To calculate each of these scenarios’ NPV, add the respective scenario’s bp change (+0bp, +25bp, +75bp, -50bp, DV01 +1bp) to each 20-period rate from section IV uniformly. Therein, all 20 discount factors are recomputed using the new shifted forward rates. The floating leg’s cash flows are also recomputed using the shifted forward rate, while the fixed leg’s cash flow remains calculated off the 4.063% from the swap's inception. Then, using the new discount factors, recompute the net present value for each period, sum all 20 periods’ PVs to get the scenario as a whole’s NPV. Please see figure 6, for an example of a September 16th +25bp rate hike with modeled out cash flows and re-calculated NPV.

The expected NPV for September 16th’s meeting is a probability weighted figure which blends together the 58.1% probability of a hold and the 41.9% probability of a hike. At −$47,485 in expected value, this isn't a treasurer betting they're smarter than the market, it's the market's own price for trading an unpredictable income stream for a fixed one, much like an insurance premium.

Figure 5: Scenario Table

Figure 6: September 16th Hike Scenario

VI. The Cost of Silence

The example of a corporate treasury enacting this swap is done for a few reasons, firstly cash flow and earning’s visibility from a budgeting and forecasting perspective, then for eventual margin protection and or strategic financial decisions. The treasurer example is not a one off case, it is a stand in for a whole category of real capital facing the exact same probability-to-forecast-to-hypothetical split outlined in section V. While another side of the coin gives up certainty entirely, and could enact a pay-fixed, receive-floating position, entered for the basis of capitalizing on the speculative hawkish view. For corporates, banks, pension funds, financial sponsors, it depends entirely on need and strategy alignment; a swap can be a speculative bet just as easily as the more commonly associated hedge.

This piece was intended to shed additional light on the upcoming FOMC meeting and what the market itself is predicting. This is not an attempt to guess through Warsh’s guidance vacuum, but rather a demonstration of how real market data fills the silence whether the Fed wants it to or not. In this case, the treasurer’s -$47,485 NPV was not necessarily a bad bet. This depends on specific goals of the organization and approved treasury policy more specifically for corporations. The negative NPV reflects the market’s price for certainty, an insurance premium. The Fed’s silence doesn’t remove the uncertainty, it just moves the job of pricing it from the Fed’s own statement onto every one of these institutions, giving a real calculable price tag once it lands there.

Footnotes: (MLA Format)

Section I

1. "Fed Meeting Today: Live Updates." CNBC, 29 July 2026, www.cnbc.com/2026/07/29/fed-meeting-today-live-updates.html.

2. Reuters. "US Treasury Yield Curve 'Twist' Reflects View Fed May Not Hike Again." Investing.com, 2026, www.investing.com/news/economy-news/us-treasury-yield-curve-twist-reflects-view-fed-may-not-hike-again-4828171.

Section II

3. "Three-Month SOFR Futures." CME Group, www.cmegroup.com/markets/interest-rates/stirs/three-month-sofr.html.

Section III

4. "Three-Month SOFR Futures." CME Group, www.cmegroup.com/markets/interest-rates/stirs/three-month-sofr.html.

5. CME Group. Three-Month SOFR (SR3) Futures Quotes. CME Group, 7 Aug. 2026, 11:20 a.m. CT, www.cmegroup.com/markets/interest-rates/stirs/three-month-sofr.html.

Section IV

6. "Three-Month SOFR Futures." CME Group, www.cmegroup.com/markets/interest-rates/stirs/three-month-sofr.html.

Section V

7. "Understanding the CME Group FedWatch Tool Methodology." CME Group, 2023, www.cmegroup.com/articles/2023/understanding-the-cme-group-fedwatch-tool-methodology.html.

8. CME Group. CME FedWatch Tool. CME Group, 7 Aug. 2026, 11:20 a.m. CT, www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html.

9. "Bank of America Expects Three Fed Hikes This Year, Says Inflation Is Getting 'Unambiguously Worse.'" CNBC, 22 June 2026, www.cnbc.com/2026/06/22/bank-of-america-sees-3-fed-hikes-in-2026-inflation-unambiguously-worse.html.

10. Remy, Hillary. "Goldman Sachs Sends Strong Message on Next Fed Rate Cut." TheStreet, 9 June 2026, www.thestreet.com/fed/goldman-sachs-sends-strong-message-on-next-fed-rate-cut.

11. "Goldman Sachs Sends Blunt Message on Fed Interest Rate Cuts." TheStreet, 11 May 2026, www.thestreet.com/investing/goldman-sachs-sends-blunt-message-on-fed-interest-rate-cuts.