Insights into the Upcoming Fed Meeting and A Strategy for Trading it

Current Fed Rate probabilities added!

Putting my personal opinions aside about where the market is and where it is going tomorrow, the intricacies surrounding Fed days can often be perplexing, to say the least.

In the world of trading, the impact of the Federal Reserve and its policies on the stock market is widely acknowledged. Traders closely follow and dissect statements from Fed members during press conferences, aiming to decode subtle cues and adjust their portfolios accordingly, anticipating potential shifts in Fed policy. Navigating through this environment can be challenging, considering the rapid and often unpredictable market responses. However, traders can still find opportunities to gain an advantage by comprehending the historical patterns commonly observed during and around Fed announcements.

Among these occasions, the most significant moments are the eight annual 'Fed Days,' which mark the culmination of each scheduled Fed meeting, often accompanied by a policy declaration typically around 2 p.m. EST. These events have been recognized for their consistent and impactful market trends, revealing a prevalent bullish inclination during these instances.

Over a 19-year period, Fed Days exhibited a notable surge of 622.31 points, surpassing the modest 281.29 SPX points gained on all other trading days. (The last time I ran the backtest in 2020) Notably, these Fed Days demonstrated remarkable resilience. Moreover, when specific conditions are applied, the distinct bullish edge of Fed Days becomes more pronounced.

The Federal Reserve's primary objective revolves around fostering a stable economic climate conducive to sustained growth. During times of economic uncertainty, the Fed often aims to stimulate the economy and frequently employs reassuring language in its announcements. However, in periods of economic expansion, the Fed may adopt a more cautious approach, tightening its policies to prevent potential overheating. This nuanced shift in communication reflects the varying economic conditions. A simple yet insightful filter that exemplifies this phenomenon is the 20-day closing high.

Out of the Fed Days, the S&P 500 (SPX) concluded at a 20-day high the day before on each occasion. Among these, ten recorded positive Fed Days, while the remaining eleven witnessed negative Fed Days.

In contrast, instances where the SPX did not conclude at a 20-day high the day before marked 62% of Fed Days with an upward trajectory.

Also, examining the market's closure position within its daily range on the day preceding a Fed Day provides valuable insights into potential instances of front-running. When the SPX closed in the top half of its daily range the day before. During the subsequent Fed Days, the average gain in these instances amounted to 0.31%. Conversely, in instances where SPY closed in the bottom half of its daily range, the average gain on the following Fed Days nearly doubled, reaching 0.59%.

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Observers monitoring the Federal Reserve do not anticipate a rate increase at the end of today's Federal Open Market Committee meeting.

It is widely predicted that the FOMC will maintain the benchmark federal funds rate within the existing 5.25%-5.50% range. As of Wednesday morning, the likelihood of Fed officials keeping rates unchanged stood at 98%, according to the CME FedWatch Tool, which monitors interest-rate futures.

While a pause had been anticipated, the probability has been increasing over the past month. At the conclusion of September, the CME FedWatch Tool indicated that the probability of a hold was only 82%.

The Federal Reserve's two-day policy meeting has started and conclude on Wednesday.

Market expectations suggest that the central bank will maintain its current interest rates, while also reaffirming its stance on keeping rates higher for an extended period. This anticipated policy stance could potentially have a positive impact on the value of the dollar. If they say the opposite it could have a negative impact on the dollar.

Borrowing costs continue to surge, significantly impacting consumers. The 30-year fixed-rate mortgage has increased by over a percentage point since the Federal Open Market Committee's last decision to raise borrowing costs. Notably, more than half of this increase has occurred in the period following the Fed's September meeting, adding pressure to an already challenging financial environment for consumers. Not only mortgages but other consumer loans such as credit cards, home equity lines of credit, auto loans, and personal loan rates have also been on the rise in recent weeks.