Historically, the Federal Reserve likes to keep interest rates in a pretty specific range: between 2 and 5 percent. The goal here is of course to maintain a healthy economy with robust economic growth, measured by an upward trending gross domestic product, or GDP, of about 2 to 3 percent year over year. A healthy economy further includes a low unemployment rate, ranging between 4.5 and 5 percent.
Currently, the Fed Funds rate, or the interest rate at which depository institutions (banks and credit unions) lend reserve balances to other depository institutions overnight, on an uncollateralized basis, remains at 2.5 percent, after today’s announcement.
Of course, rate adjustments are common, and depend largely on how the Federal Reserve views the state of the economy. But often more important than what the Fed actually decides to do with interest rates, is how investors and traders perceive the change.
The Fed release is a big deal, and traders anxiously await the decision, ready to pounce on any available imbalances in the market. Interestingly, there is a pattern. Typically there is a lull before the release, followed by active participation by traders, as they struggle to comprehend the news, and translate it into trading opportunities.
New York Fed researchers, using data running from 1994 to 2011, demonstrated that equities rose, on average, the afternoon of the day before the release, and then more steeply on the morning of FOMC announcement days. Following the announcement at 2:15 p.m. Eastern, S&P 500 prices may have fluctuated as traders struggled to interpret the specifics of the announcement, but, generally, market prices ended above their pre-announcement level and from where they opened the day before.
In 2018, the Fed raised interest rates four times, in each instance by a quarter of a point. In each occurrence, the market reacted initially violently, as traders absorbed the new information and went to battle.
For 2019 however, the Fed is more cagey in its approach to rate hikes. As Nicholas Colas, co-founder of DataTrek Research explains on Market Watch, “Markets expect to see a more dovish set of interest rate projections on Wednesday, and a still-patient Chair Powell. All the recipe items to see a Fed Drift, in other words,” Colas said. “He may also give more color on the endpoint for the Fed’s balance sheet unwind. This would also be a positive for stocks.”
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