The Federal Reserve has been signaling a possible interest rate hike in the near future, leading to increased speculation among market participants. In this blog post, we will explore the current state of the Fed probabilities game and examine the potential for the market’s spread between the overnight index swap (OIS) and federal funds rate to narrow by December 2026.

Firstly, let’s take a look at the current state of the Fed probabilities game. The Federal Open Market Committee (FOMC) has been consistently signaling a possible interest rate hike in the near future, with the latest FOMC meeting resulting in a unanimous vote to keep the federal funds rate in its current range. This has led to an increase in the probability of a rate hike in the coming months, as reflected in the Fed probabilities curve.

However, the market’s spread between the OIS and federal funds rate remains relatively wide, indicating that there is still some uncertainty among participants regarding the timing and magnitude of any potential rate hike. The OIS is a forward-looking measure of the federal funds rate, while the federal funds rate is the short-term interest rate at which depository institutions borrow and lend money from each other overnight.

So, will the market’s spread between the OIS and federal funds rate narrow by December 2026? It’s difficult to predict with certainty, but there are a few factors that could contribute to a narrower spread. Firstly, if the Fed continues to signal a possible rate hike in the near future, this could lead to a decrease in the OIS and an increase in the federal funds rate, resulting in a narrower spread between the two. Secondly, if inflation remains under control and economic growth remains steady, this could also contribute to a narrower spread.

On the other hand, there are also factors that could lead to a wider spread between the OIS and federal funds rate. For example, if the Fed were to delay any potential rate hikes due to concerns over inflation or economic growth, this could result in a decrease in the federal funds rate and an increase in the OIS, leading to a wider spread between the two.