Why are these probabilities important? They aren’t just gambling odds for market participants to bet on. These probabilities signal if the bond market is actually ready for a hike rate and if the Federal Reserve has correctly communicated their intentions. In other words, whether or not the bond market has discounted Fed intentions; and if the bond market agrees with the Federal Reserve based on the economic conditions. You see, the Federal Reserve doesn’t control interest rates, bond markets do. And when the Fed wants to hike, while the bond market doesn’t expect it (low probability), things don’t go smoothly. One of the worst FOMC mistakes was tightening rates in 1994, when the probability of a rate hike wasn’t priced in, which sparked a serious bond market crash.
Source: Short Side of Long