Fed Meeting Preview 

Federal Reserve monetary policy is having a huge impact on financial markets. 

At today’s meeting, the Fed is expected to announce a 0.50% increase to 4.25%-4.50%. 

However, all the focus will be on what Chair Powell says in his press conference. This is what to watch for: 

● Size of February rate hike: Will Chair Powell signal a 0.50% or 0.25% rate hike in February?

As the chart below shows the market is assigning a 52% chance of a 0.25% hike versus a 40% chance of a 0.50% hike.

Any signal that Powell is favoring 0.25% over 0.50% will be very bullish for stocks. 

February Fed meeting probabilities (Source: CME) 

● The peak or “terminal” interest rate: This is the interest rate at which the Fed will stop raising rates which will be bullish for stocks. At its last meeting, the Fed forecast a terminal rate of 4.6%. Currently, the market is expecting a terminal rate of 5% in May 2023. If the Fed forecasts a terminal rate significantly above 5% that will be bearish for stocks. 

The table below shows how the Nasdaq has moved following the Fed’s announcements:

Fed Meeting	Day of	Day After	One Week After
January 26	-2.4%	-1.4%	3.9%
March 16	2.4%	1.3%	6.0%
May 4	3.1%	-5.0%	-9.7%
June 15	1.1%	-4.0%	0.8%
July 27	2.3%	1.0%	7.7%
September 21	-2.2%	-1.4%	-3.6%
November 2	-3.3%	-1.7%	-4.9%
Average % change	0.1%	-1.6%	0.0%
Average % Volatility	2.4%	2.3%	5.2%

Takeaways: 

1. Volatility is very high. Whereas the average % change on the day of the Fed meeting is basically flat at 0.1% the average volatility is 2.4%. Put differently, on average, the Nasdaq will either be up or down 2.4%. 
   • The day after remains volatile as well as the Nasdaq is expected to be either up or down 2.3% on average. 
   • Over the next week the Nasdaq is expected to be either up or down 5.2% on average 
2. Market performance on the day of the Fed meeting can give a clue about performance over the coming week. On 5 out of 7 (71%) occasions the Nasdaq performance on the day of the Fed meeting was matched by performance one week after. Therefore if the market finishes in the green on Wednesday there is a good chance of a strong rally over the coming week.

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