Fed Meeting Preview 

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 AfterOne 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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