What Traders are Watching for in the Federal Reserve Meeting

Janet Yellen announced the Federal Funds Rate would be increased by 0.25% on December 14th, 2016.

This set the interest rate at 0.25% to 0.50% and was the first hike in over 7 years.

Since then, the Federal Reserve has raised a total of 3 times since starting in 2016.

Here is a chart of the Federal Funds Target Rate:


Inflation Worries the Fed About Hiking Further

Recent statements and speeches from Federal Reserve members have stated that lower inflation is transitory, but is a concern. Even the most hawkish (support rate increases) members showed signs they are worried about hiking rates further without increasing inflation.

The most recent inflation numbers on September 14th, 2017 showed there was no increase in inflation. This will likely mean that we are not going to see another rate hike this year.


Fed Will Likely Not Hike Again in 2017

Most traders and market participants are pricing in a 50% chance of a December rate hike. We are not certain this will happen, as inflation data is sour.

In addition, two Hurricanes have caused significant damage to Texas and Florida. These events are believed to weigh down the GDP number by as much as 1%, according to numerous sources.


What’s Important in the Federal Reserve Meeting

Traders are looking to find out more information about two things primarily:

  1. What is the future path of rate hikes shown on the dot plot – how much and how far out will rates increase?
  2. Details on how the Fed will start winding down their massive balance sheet – how much money a month, what will be the trajectory, how much in total over what period, etc

There is very little expectation for a rate hike this week. What’s more important is the details and economic outlook given all of the hurricane damage and weak inflation.


How to Trade a Dovish Federal Reserve Announcement  (More Likely Scenario)

If the meeting minutes at 2PM EST show that Federal Open Market Committee (FOMC) members are concerned about raising rates, this is a dovish outlook.

Dovish minutes will mean rates will not be raised much higher over a longer period of time.  Under this scenario the market is likely to react as follows:

  1. SP500 and equities will rally
  2. US dollar will get hit hard, and be sold off
  3. US 30Y bond futures will rally as the yield drops
  4. Gold prices will rally higher

Before placing any trades, be sure to let the initial few minutes of volatility play out without taking a position. The first few minutes are all algorithmic activity that you cannot compete with.

Stay patient and watch closely, and the dominant side will be very easy to see.


How to Trade a Hawkish Federal Reserve Announcement (Less Likely Scenario)

If the minutes and press conference from Janet Yellen show a hawkish Fed intent on raising rates despite weak inflation and hurricane damages, this is a “hawkish” outlook.

Hawkish sentiment will mean rates will continue to be raised over a long period of time. The more aggressive the expected raises shown on the dot plot,  the more violent the market moves will be.

Under this scenario the markets will likely react as follows:

  • SP500 and equities will stay flat, or sell off slightly (chop is also likely)
  • US dollar will rally sharply as it takes out a lot of the accumulated short sellers
  • US 30Y bond futures will get hit hard, as bond yields rally
  • Gold prices will drop significantly to near term support (and could recoup all losses in following few days)

How to Trade the Federal Reserve Announcement – Conclusion

Trading the Federal Reserve event can be very risky.

Remember what you are trading.  It is not what the actual event means in simple terms, what is more important is how will the reality be different then current expectations priced in.

Most traders are now assuming that the Federal Reserve will be more dovish, and delay more rate hikes temporarily to see more inflation and jobs data.  This is the priced in scenario, and markets will likely not make big moves.

If we get a hawkish Fed, we will see some pretty big moves during the afternoon and some pretty heavy volatility return to the market.

In fact, a Hawkish Fed can cause a much broader sell off in equity markets.

Janet Yellen is aware of this, and this is why we don’t believe we will see much appetite for higher interest rates.

But it is an open and free market, anything can happen.

Be ready to trade any and every thing.

Good luck and manage risk and the profits will come as a reward. Don’t chase them.


You can also learn about our institutional grade day trading package here, or learn to trade a more passive options strategy in our package here.

The information contained in this post is solely for educational purposes, and does not constitute investment advice. The risk of trading in securities markets can be substantial. You should carefully consider if engaging in such activity is suitable to your own financial situation. TRADEPRO Academy is not responsible for any liabilities arising as a result of your market involvement or individual trade activities.