FOMC Rate Decision Looms – What To Look For

Imagine a group of people who decide how easy or hard it should be for people and businesses to borrow money. This group is the FOMC. They do this by setting a target for a key interest rate (the federal funds rate). The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve System (the Fed) that determines the direction of monetary policy in the United States.

The FOMC holds eight regularly scheduled meetings per year, where they discuss economic and financial conditions and decide on the appropriate stance of monetary policy, including the target range for the federal funds rate. Today's meeting is expected to see rates held, with plenty of eyes on the dot plot.

The “FOMC Rate Decision” is simply the decision this group makes about the key interest rate. They can decide to:

• Raise rates: This makes borrowing more expensive, which can help slow down inflation (when prices are rising too fast).
• Lower rates: This makes borrowing cheaper, which can help boost a slowing economy.
• Keep rates the same: This suggests they see the economy as balanced for the time being.

February 2025 data showed core inflation at 3.1% and headline inflation at 2.8%, both stubbornly above the Fed's long-term 2% target. This persistent inflation would typically warrant further rate hikes. However, the FOMC is also acutely aware of the potential for economic slowdown, and potentially, the lagging effects of previous rate increases. The “hold” decision signals that the Fed is taking a cautious, data-dependent approach, carefully assessing the cumulative impact of its tightening cycle before making further moves.

The meeting is also particularly important because the Fed released its quarterly Summary of Economic Projections (SEP), including the famous “dot plot.” The dot plot provides a visual representation of where each FOMC member anticipates the federal funds rate will be in the coming years.

This provides the market with a glimpse into the Fed's internal thinking about the future path of monetary policy. Any significant shift in the dot plot – either upward (more hawkish) or downward (more dovish) – could trigger substantial market volatility. Traders closely analyze the dot plot for clues about the timing and magnitude of potential future rate cuts or hikes.

Volatility Around FOMC Meetings

FOMC meetings are notorious for generating market volatility. Historically, the S&P 500 has experienced average daily movements of around 2% on FOMC days, compared to 1.25% on non-FOMC days. This heightened volatility creates both opportunities and risks for traders.

Several trading strategies revolve around FOMC announcements, each with its own rationale and level of risk:

• Pre-Announcement Positioning: Before the announcement, traders often position themselves based on their expectations of the Fed's stance. If a dovish tilt is anticipated (suggesting a leaning towards lower rates in the future), investors might increase exposure to rate-sensitive sectors like real estate and utilities, which tend to benefit from lower borrowing costs. Conversely, expectations of a hawkish stance (higher rates) might lead to a reduction in equity exposure, particularly in growth stocks, which are more sensitive to interest rate changes.
• Post-Announcement Reaction: The immediate market reaction to the announcement, and particularly to Fed Chair Jerome Powell's press conference, is crucial. Traders often look for short-term opportunities based on whether the Fed's message is perceived as more hawkish or dovish than expected. For example, if the Fed signals a greater concern about economic growth, traders might go long on consumer-sensitive stocks, anticipating that the Fed will eventually need to stimulate the economy.
• Momentum and “Drift”: Research indicates that asset prices can exhibit a “drift” in the same direction as the initial market reaction for up to 15 days following the announcement. This suggests that there might be opportunities to profit from momentum trades even after the initial flurry of activity has subsided.
• Commodities and Currencies: FOMC decisions also impact commodities and currencies. Gold, often seen as a safe-haven asset and an inflation hedge, can experience increased demand before a dovish announcement, as a weaker dollar (often associated with lower interest rates) can make gold more attractive to foreign investors. Crude oil prices are sensitive to economic growth expectations, which are heavily influenced by the Fed's monetary policy. Currency markets, particularly the US dollar, react strongly to the Fed's tone. A dovish stance tends to weaken the dollar, while a hawkish stance strengthens it.
• The Day After: Market history shows that the day after an FOMC meeting will show the market closing negatively 66.7% of the time.

The Fed's “data-dependent” approach means that future decisions are contingent on incoming economic data, which can be unpredictable. Historical patterns, while informative, do not guarantee future outcomes. Furthermore, from 1996-2020 the SPDR S&P 500 ETF Trust (SPY) experienced a turnover volume decrease by approximately 24% on average in the 24 hours before FOMC announcements, and increased by a similar amount in the 24 hours after the announcements.

Successful trading around FOMC meetings requires a multi-dimensional approach. Relying solely on the rate decision itself is insufficient. Traders should analyze the Fed's statement, the SEP, and the nuances of Chair Powell's press conference.

Combining this “fundamental” analysis with technical analysis (studying price charts and patterns) and a thorough understanding of market sentiment can lead to more informed trading decisions. Market volatility is higher than normal during and directly after FOMC press conferences, especially those given by Jerome Powell.

Key Insights: Markets typically experience 60% higher volatility on FOMC meeting days. Trading volume decreases by ~24% before announcements and increases by a similar amount afterward.

Historical Context

• March 2020 Coronavirus interest rate cut: In an emergency move, the FOMC cut rates by half a percentage point in response to the economic risks posed by the pandemic.
• Saturday Night Massacre (1979): Fed Chairman Paul Volcker increased the Fed Funds rate significantly to combat high inflation.
• Zero Interest Rate Policy (ZIRP) (December 2008 to December 2015): the FOMC had lowered the target for the federal funds rate to nearly zero.
• 1961, Operation Twist: To strengthen the dollar the Fed began to shorten the maturity of public debt in the open market.