Various news articles state that next Wednesday a rate hike by the FED was expected.
Yet when I look at fed-rate futures, nobody seems to expect that: http://www.cmegroup.com/trading/interest-rates/stir/30-day-federal-fund.html
Can someone with industry insight elaborate on what traders expect?
Verbal answers on what is currently expected regarding the FED's rate hike are also accepted.
Answer
Fed funds futures settle into the average daily Fed Funds effective rates over the month. The December 2015 futures contract therefore covers the current Fed funds target rate (0-25bp) for 16 days, and then the new rate range (expected to be 25-50bp) for 15 days.
To compute the exact probability of a rate hike involves some assumptions. For simplicity, let's ignore the difference between Fed funds target rate and Fed funds effective rate. Further, let's use the mid-point of the Fed funds target range as the target rate. For the first 16 days of December then, we are talking about an average realized rate of 12.5 bp (mid point between 0 and 25 bp). As of last Friday, Dec FF contract settled at 99.78, implying a rate of 22bp. To get to this settlement price, the target "rate" for the final 15 days must satisfy $$ 22 = \frac{12.5 \times 16 + r \times 15}{31}.$$ This suggests $r = 32.133333333 \text{ bp}$.
Now the only thing left is to compute the probability of a hike. Let $p$ be the probability of a 25 bp hike (from 12.5 to 37.5), and $1-p$ be the probability of being on hold (staying at 12.5). Then we have $$ 37.5 p + 12.5\times (1 - p) = 32.1333. $$ This implies that the market is pricing in a $(32.13 - 12.5)/25 = 79\%$ probability of a rate hike in December.
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