Ticker&TapeThe Fed and interest rates
The Federal Reserve is the most watched institution in the stock market. Its decisions on interest rates ripple through every stock, sector and index. Here is what it does and how to read what traders expect from it.
What the FOMC does
The Fed's interest rate decisions are made by the FOMC (Federal Open Market Committee). It meets eight times a year, about every six weeks. At each meeting it sets a target range for the fed funds rate, the rate banks charge each other for overnight loans. That rate influences everything from mortgages to credit cards to the yields on government bonds.
The Fed has two jobs: keep prices stable (inflation near 2%) and keep employment high. When inflation runs hot, it raises rates to cool the economy. When the economy weakens, it cuts rates to support it.
Cuts, holds and hikes
Moves are usually 0.25 percentage points (25 basis points; one basis point is 0.01%). Bigger moves of 50 or 75 basis points signal urgency.
- Cut: the rate goes down. Borrowing gets cheaper. Usually supportive for stocks, especially growth stocks, unless the cut comes because a recession is starting.
- Hold: the rate stays the same. The market then focuses on the statement and the press conference for clues about the next move.
- Hike: the rate goes up. Money gets more expensive, which tends to pressure stock valuations.
The statement, the press conference and the dot plot
The decision is released at 2:00 p.m. New York time, and the Fed Chair holds a press conference at 2:30. Markets often swing sharply in both directions during that hour, so the first move is not always the real one.
Four times a year the Fed also publishes its projections, including the dot plot. Each dot shows where one Fed official thinks the rate should be at the end of the coming years. The dots are not a promise, but they show whether officials lean toward more cuts or more hikes than the market expects.
Reading the odds from fed funds futures
Traders bet on future Fed decisions with fed funds futures. From their prices you can work out the market's implied probability of a cut, a hold or a hike at each upcoming meeting. The Macro page shows these odds for the next meetings.
If the odds of a cut at the next meeting are 90%, a cut is already priced in and the decision itself will barely move stocks. The surprise would be a hold. Watch how the odds change after big releases like CPI or the jobs report: a sharp shift tells you the data changed the outlook for rates.
Common mistakes
- Treating a rate cut as automatically bullish; cuts during a slowdown can come with falling stocks.
- Trading the first minutes after the 2:00 p.m. decision, when moves often reverse.
- Reading the dot plot as a fixed plan instead of a set of opinions that change with the data.
- Ignoring the odds and being surprised by a decision the market had already priced in.
Key points
- The FOMC sets the fed funds rate eight times a year; cuts tend to help stocks and hikes tend to weigh on them.
- What moves markets is a decision or outlook that differs from what fed funds futures already price in.
- Check the cut/hold/hike odds on the Macro page before Fed days and after major data releases.
Check what you learned
Answer at least 2 of 3 correctly to complete the lesson.
1. Fed funds futures show a 90% chance of a cut at the next meeting, and the Fed cuts. What is the likely market impact of the decision itself?
What moves markets is a decision or outlook that differs from what futures already price in.
2. Rate cuts usually support stocks. When might a cut not help?
Cuts make money cheaper, but if they are a response to a weakening economy, falling profits can outweigh the benefit.
3. Stocks jump sharply at 2:00 p.m. on a Fed day. How should you read that first move?
The first move is not always the real one. The statement, the press conference and, four times a year, the dot plot can shift expectations within the hour.
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