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|
|Average % change||0.1%||-1.6%||0.0%|
|Average % Volatility||2.4%||2.3%||5.2%|
- 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
- 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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