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Fed Day: 5 Things Investors Need to Know for FOMC Meeting
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Most of the time, the Federal Open Market Committee (FOMC) interest-rate decision and the subsequent press conference with the Federal Reserve Chairman get overly hyped. For traders, the FOMC (which occurs eight times per year) is akin to a gambling junky sitting at the slot machine, not knowing they will win or lose but nevertheless excited for the adrenaline rush of the anticipation and the flashing lights on the screen. In the case of financial television, it means that TV networks can leverage the hype to draw in more viewership.
The truth about each of the FOMC’s regularly scheduled meetings is that, in many instances, the Fed has already dictated what their monetary policy is in advance, and markets have already priced the decision in. However, at the risk of sounding cliché and hypocritical, “this time is different.”
After hiking rates rapidly and turning “hawkish” in 2022 to quell inflation, Jerome Powell is expected to make his first change to interest rates (he is highly likely to cut rates) in more than a year.
Finally, the options market agrees with this prognosis. The options market is pricing in the largest implied move since March 2023 during the height of the Regional Banking ((KRE - Free Report) ) crisis. Investors should expect a move of more than 1% in the S&P 500 Index ETF ((SPY - Free Report) ) and the major indices.
Image Source: Zacks Investment Research
2. How Much Will the Fed Cut Rates By?
For weeks investors anticipated that the Fed would start with a gradual 25 bps interest rate cut. However, the market is pricing in a more than 60% chance of a 50-bps cut.
3. 50-bps Cut Can Mean Panic
If history is a guide, investors should hope for a gradual cut. When the Fed starts a rate-cutting cycle with a 50-bps cut, it can be a signal that the Fed is concerned about the economy and cause panic on Wall Street. This phenomenon occurred in 2001 and 2007.
Image Source: Charlie Bilello, Creative Planning
4. Watch for “False Moves”
Wall Street’s attempt to quickly position based on Fed rhetoric interpretations typically leads to two or three “false moves” on Fed Day. Ping pong-like price action on Fed Day and the following days the norm.
5. Key Support Levels
The S&P, Russell 2000 Index ETF ((IWM - Free Report) ),Nasdaq 100 ETF ((QQQ - Free Report) ), and Dow Jones Industrial Average ETF ((DIA - Free Report) ) sit atop their 50-day moving averages. Should stocks retreat post-Fed, this zone will be a critical level to watch.
Bottom Line
Though Fed decision days are often overhyped, this time is different. The market context and uncertainty surrounding the Fed’s decision should produce fireworks later today and into the end of the month.
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Fed Day: 5 Things Investors Need to Know for FOMC Meeting
Most of the time, the Federal Open Market Committee (FOMC) interest-rate decision and the subsequent press conference with the Federal Reserve Chairman get overly hyped. For traders, the FOMC (which occurs eight times per year) is akin to a gambling junky sitting at the slot machine, not knowing they will win or lose but nevertheless excited for the adrenaline rush of the anticipation and the flashing lights on the screen. In the case of financial television, it means that TV networks can leverage the hype to draw in more viewership.
The truth about each of the FOMC’s regularly scheduled meetings is that, in many instances, the Fed has already dictated what their monetary policy is in advance, and markets have already priced the decision in. However, at the risk of sounding cliché and hypocritical, “this time is different.”
After hiking rates rapidly and turning “hawkish” in 2022 to quell inflation, Jerome Powell is expected to make his first change to interest rates (he is highly likely to cut rates) in more than a year.
5 Things to Know About Today’s Fed Meeting
1. Expect Volatility
There are several reasons this Fed meeting is likely to induce volatility. September’s second-half seasonality is historically weak and the worst time to own equities. Meanwhile, triple-witching expiration occurs when stock options, stock index futures, and stock index options expire on the same day, Friday. Moreover, the Fed’s decision is being made in the grander context where geopolitical issues have escalated, and the highly anticipated presidential election looms.
Finally, the options market agrees with this prognosis. The options market is pricing in the largest implied move since March 2023 during the height of the Regional Banking ((KRE - Free Report) ) crisis. Investors should expect a move of more than 1% in the S&P 500 Index ETF ((SPY - Free Report) ) and the major indices.
Image Source: Zacks Investment Research
2. How Much Will the Fed Cut Rates By?
For weeks investors anticipated that the Fed would start with a gradual 25 bps interest rate cut. However, the market is pricing in a more than 60% chance of a 50-bps cut.
3. 50-bps Cut Can Mean Panic
If history is a guide, investors should hope for a gradual cut. When the Fed starts a rate-cutting cycle with a 50-bps cut, it can be a signal that the Fed is concerned about the economy and cause panic on Wall Street. This phenomenon occurred in 2001 and 2007.
Image Source: Charlie Bilello, Creative Planning
4. Watch for “False Moves”
Wall Street’s attempt to quickly position based on Fed rhetoric interpretations typically leads to two or three “false moves” on Fed Day. Ping pong-like price action on Fed Day and the following days the norm.
5. Key Support Levels
The S&P, Russell 2000 Index ETF ((IWM - Free Report) ), Nasdaq 100 ETF ((QQQ - Free Report) ), and Dow Jones Industrial Average ETF ((DIA - Free Report) ) sit atop their 50-day moving averages. Should stocks retreat post-Fed, this zone will be a critical level to watch.
Bottom Line
Though Fed decision days are often overhyped, this time is different. The market context and uncertainty surrounding the Fed’s decision should produce fireworks later today and into the end of the month.