Probabilities Around Past Fed Meetings: What Happens to the Market 1 Week to 6 Months Out?
Probabilities Around Past Fed Meetings: What Happens to the Market 1 Week to 6 Months Out?
Probabilities Around Past Fed Meetings:
What Happens to the Market 1 Week to 6 Months Out?
The Federal Open Market Committee (FOMC) decision comes on Wednesday, September 17th at 1:00 pm CST — with Chair Jerome Powell speaking shortly after at 1:30 pm CST.
We compiled the last five years of Fed rate hikes (+) and cuts (–) and measured what happened in the S&P 500 one week, one month, three months, and six months later
So in most situations, since 2020, the market is up in 1 week, 1 month, 3 months, and 6 months. But that probability will be higher if we have a rate cut. Generally speaking, rate cuts are good for the market. You can see the past rate increases (▵) and rate cuts (▽) below:
If you dig a little deeper, you can see the pattern: the market tends to rise after rate cuts, but those big moves of +2% or more actually happen less often than when the Fed leaves rates unchanged.
That makes sense. Rate cuts usually signal trouble in the economy. While they can spark rallies in the short to medium term (one to three months out), the effect of larger moves of 2%+ to the upside tends to fade the further out you go.
The probabilities right now that we will have a rate cut are very high (roughly 96%) according to the CME’s Fedwatch tool. And once it happens, the probability is very high that we will continue to step down in interest rates.
If the Fed does cut rates, history suggests the probabilities favor the market moving higher. In fact, the probability of gains increases the further out you go. But there’s a catch - the size of those moves tends to diminish. By six months out, the pattern settles into more modest, stable returns.
That dynamic makes sense: rate cuts are often a signal that something is wrong in the economy. They can ignite relief rallies in the short to medium term, but it can cap how long those rallies run.
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