SOFR Futures: Understand Market Pricing for future Fed PolicySR3Z2026-100CME_DL:SR3Z2026-100PepperstoneWith the Federal Reserve having just cut interest rates and guiding towards further cuts this year and through 2026, I have received several requests to explain how traders can understand for themselves what the market is pricing and expecting for Fed policy by a specific point in time. Perhaps the more simplistic way to view what is priced or implied for the next FOMC meeting is to use the ‘FedWatch’ tool on the CME's website - https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html . This looks at the distribution of expectations for the next FOMC meeting, as implied in the fed funds futures pricing. Interest rate futures can guide our understanding of what’s priced One way traders can gauge the market’s expectations for future Fed policy—commonly referred to as “what is priced in”—is through interest rate futures pricing or in interest rate derivatives (interest rate swaps, for example). These are tradable instruments that allow investors and corporates to hedge their interest rate risk, while also giving speculators a vehicle to express views on where they see Fed interest rate policy at a specific point in time. TradingView doesn’t offer pricing on IR swaps, but it does offer pricing on SOFR 3-month futures and Fed funds futures, both of which can be useful in understanding where the market sees policy risk. My preference is SOFR futures, as they are comparatively more liquid, especially in the further-dated contracts for 2026 and 2027 and are more heavily traded than Fed funds futures. What is the SOFR rate? SOFR is one of, if not the most important, markets in the entire financial ecosystem. It is the first derivative of markets and is worth taking a moment to familiarise yourself with. SOFR (Secured Overnight Financing Rate) essentially represents the interest rate at which financial institutions lend cash overnight (and what borrowers pay), with borrowers pledging US Treasuries as collateral. The Federal Reserve influences SOFR through its monetary policy settings, with the rate typically tracking within the Fed’s target corridor. This corridor is defined by the upper bounds and what the Fed pays banks on reserves (currently 4.25%) and the lower bounds and what the Fed pays financial institutions that lend overnight repo to the Fed (the ‘RRP rate’, currently 4%). SOFR 3-month futures, therefore, reflect the market’s expectations of what the overnight risk-free rate will average over a defined three-month period at a forward point in time. For example, the SOFR 3-month December 2026 futures contract (TradingView code: SR3Z2026) reflects the market’s expected average interest rate on overnight cash borrowing from December 2026 through to the contract’s expiration on 16 March 2027. Since SOFR is guided by the Fed’s policy corridor, the futures price on that contract provides an indication of where the Fed could set interest rates at a given point in time. Calculating the markets expectations for future Fed policy from SOFR futures The price of SOFR 3-month futures moves dynamically through supply and demand, with rates traders reacting to economic data, Fed communications, sentiment in other markets (such as equities), and liquidity conditions. Upon expiration, futures are cash settled at 100 (or “par”), so the implied interest rate for a set contract is calculated as 100 minus the futures price. For example, if SR3Z2026 trades at 96.99, the implied rate for the SOFR between Dec 2026 and 16 March 2027 is 3.01% (100 – 96.99). If the current SOFR spot rate (TradingView code: SOFR) is 4.38%, this therefore implies that the market is pricing 139 basis points of further Fed rate cuts by early 2027. You can add all the SOFR 3-month futures contracts to a watchlist in TradingView, ordered by the contract period. For instance, starting with SR3U2025 (the September SOFR futures expiring on 16 December 2025). As we see in the screenshot, based on today’s curve, the perceived low point—or the pricing for the “terminal” rate—in the Fed’s cutting cycle is seen in the December 2026 contract, at 2.99%. Why is this useful for all traders? Firstly, it provides a clear guide to the market’s view of future Fed policy and what is currently already discounted in interest rate markets. This matters because the USD, US Treasuries, equities, and even gold tend to move in line with—or inversely to—shifts in interest rate futures pricing. If the market has fully priced in a rate cut, then when the Fed delivers that cut, the market reaction should be minimal. Conversely, if the market expects little or no cut and the Fed surprises by cutting rates, one can expect an outsized reaction in assets like the USD or US 2-year Treasury yields. This makes SOFR futures incredibly helpful for traders across asset classes when managing risk around key data releases or Fed meetings. They can also help assess perceived recession risk. If the Fed’s “neutral rate”—the equilibrium setting that is neither stimulatory nor restrictive—is 3%, and the market prices the terminal rate in the cutting cycle at the same level, this suggests a low probability of recession. A recession risk scenario would likely see the market pricing the Fed’s terminal rate well below 2.5%. Given how often the question “how do I know what’s priced in?” comes up, I hope this offers a clear framework for assessing it through SOFR futures on TradingView. Good luck to all