A US Recession through the lens of Polymarket

Introduction

Prediction markets such as Polymarket, gained considerable traction during the run up to the US election in November 2024. Allowing users to buy and sell tokens that represent their view on the future outcomes of a particular event, onchain prediction markets act as a useful tool for gauging the real-time sentiment of the probability of each outcome. We first covered Polymarket through the lens of the US election here.

In this report we will explore the probability of a US recession based on on-chain Polymarket data. We will then also identify some differences in the probabilities between several related Polymarket markets that track the path of monetary policy by the Fed, and compare them to similar measures in traditional finance markets. Our goal is to highlight the discrepancies in sentiment based on data from on-chain and off-chain markets and identify some dislocations between markets. However we do note that many of these dislocations in price cannot be meaningfully taken advantage of in sizable positions. That’s because of the low levels of liquidity (often close to $1,000) in many of these markets despite the reported high volumes.

“It's a recession when your neighbor loses his job; it's a depression when you lose yours”

President Trump’s mercurial approach to policy making (particularly on global trade) has resulted in renewed discussion of a precipitating global recession — or at least a recession in the US. 

Currently, the Polymarket market entitled ‘US recession in 2025?’ (with $2.4M in total volume), has traders predicting a 50% chance of the event outcome occurring. This particular market was first created during the ‘Trump Trade’ period, when markets were in a euphoria stage – that sentiment meant odds of a US recession were muted. 

More recently, as Trump’s tariff pursuits grew exponentially more aggressive, the probability of a US recession has thundered back. The narrative has gained particular steam since Apr 2, following the announcement of “reciprocal tariffs” that have since escalated into a full tit-for-tat trade war between the US and China.

The above chart shows that Polymarket is pricing in the odds of an outright recession in the US distinctly higher than Trad-Fi based prediction models. The blue line is tracking the aforementioned market on Polymarket. The red line is a US Recession Probability Forecast from Bloomberg over the next year. Bloomberg derives a median forecasted probability of a recession from monthly and quarterly surveys conducted by Bloomberg themselves and forecasts from various banks, with the model updated on a daily basis. We can see it ticked up slightly ahead of the Apr 2 “Liberation Day” tariffs and has remained 10% higher than in February. 

The green line is another Bloomberg model that calculates the probability of a recession within the next ‘N’ months using the “yield curve to guage the N-month risk of recession”. This model in particular predicts the probability of a recession within 12 months based on the 2s10s US Yield Curve (10Y yield minus 2Y yield). Again, this is calculated on a daily basis, and follows the trend of the other two – each model recently spiked, but Polymarket stands out. It is pricing in a recession at a two times greater probability than that implied by treasuries markets or median bank forecasts. 

CME Vs Polymarket: Out with the old, in with the new?

We can also explore market expectations of a recession in the US through the lens of the Fed’s cutting cycle that began back in September 2024, but has been on pause since the Dec 2024 meeting. That cutting cycle originally stemmed from labour market weakness which worried markets in Summer of 2024, and led to the 50bps bumper cut in September. 

We found a number of markets on Polymarket which are betting on a different path course for monetary policy in the US when compared to more traditional finance probabilities. 

Take the following series of charts: here we plot the implied probability of 1, 2 and 3 rate cuts according to the market on Polymarket entitled “How many Fed rate cuts in 2025?” and comparatively we have the unconditional probability of the same number of cuts by 10 Dec 2025, the date of the Fed’s final meeting of the year, implied by 30-Day Fed Funds futures prices. Across both venues, a move in rates (whether a cut or a hike) is assumed to be of a single 25bps in size, with multiple cuts broken down into 25bps chunks.

One observable trend we see from these charts is for the case of 1 rate cut the two markets follow each other quite closely – but Fed Funds futures prices are showing traders are less convinced of the Fed cutting rates only once in 2025 compared to those on Polymarket who see a 10% chance of just one cut. Then, for the more extreme move of 3 rate cuts in 2025, CME Fed Funds futures prices are implying a 33.5% probability, whereas Polymarket is pricing in a lower 19%. 

For an even more extreme case however, Polymarket traders are expressing a 10% implied probability that the Fed could cut rates 8 or more times in 2025. That would be equivalent to over 200bps of cuts over the remaining six Fed meetings for the year. That suggests a few different possibilities. One is that Polymarket is pricing in the Fed cutting by a larger amount than 25bps per meeting. Or, that Polymarket traders are pricing in a potential outcome where the FOMC is forced to make larger cuts through emergency meetings, as was the case in Covid 2020 and in 2008. The second option could indeed be a reason for why the probability of 8 or more rate cuts is as high as 10% – the market entitled “Fed emergency rate cut in 2025?” is currently at a significant 26%, and at its peak was upward of 30%. According to the rules of the 8 or more cuts market, “if the FED cuts rates by 50 bps after a meeting, it would be considered 2 cuts (of 25 bps each)” and therefore any meaningful pricing of an emergency cut could explain why Polymarket prices are higher.

When comparing the probability of 8 or more rate cuts occurring according to CME Fed Funds futures however, we see it does not even register on the chart: indeed the probability is effectively 0%. 

Conclusion

Through this report we identified different implied probabilities around the case of whether the US economy undergoes a recession in 2025 via markets on Polymarket and traditional finance models. 

We also explored several Polymarket markets tracking the policy path that the Fed may undergo – by doing so, we identified traders on Polymarket pricing in a sizable 10% probability that the FOMC makes more than 8 interest rate cuts by year end. A cutting cycle of this magnitude, given that two out of eight Fed meetings have already passed, suggest outsized rate cuts above 25bps per meeting or emergency rate cuts. One reason (though not the only one) for an emergency rate cut would be a marked weakness in the US economy which the Fed would try and act upon before it deteriorates further – that suggests markets on Polymarket are pricing in a meaningful probability of a potential recession in the US in 2025, or at least at a degree higher than traditional finance market models. 

Despite the fact that Polymarket markets do provide dislocations, we highlight that because liquidity is incredibly small on many markets these mispricings are very difficult to take advantage of in large position sizes. Additionally, and perhaps a result of the inability to make large directional bets, the probabilities on Polymarket are likely not representative of the true “price” and probability that markets would be willing to trade at. If these markets did indeed have greater liquidity we expect that the difference in on-chain and off-chain probabilities would have likely narrowed out.