🚨I’ll be live at 3:30 p.m. ET with Nate🚨
We’ll cover creating spreads — including my favorite spread in the current market and more [tap to join us for Closing Playbook]!
Most traders think that when an outcome has a 92.7% probability, it’s already priced in. But an expected decision can still produce an unexpected market reaction — and tomorrow’s Federal Open Market Committee decision could prove why.
Right now, the market is anchored by the FOMC, and the CME Group’s FedWatch tool is pricing in a 92.7% chance the Fed will hike. Traders are waiting for the decision before committing to their next move, which shows just how much weight the market has placed on this announcement.
Here’s what most people miss: The market can price in a rate hike, but it can’t fully price in every consequence of that hike. The Fed’s language, its outlook for future policy and the market’s interpretation of tighter financial conditions will determine what happens next.
Scenario 1: The Expected Rate Hike
The base case is a rate hike, with a 92.7% market-implied probability. That doesn’t mean the announcement will be a nonevent.
An initial reaction could quickly reverse as traders examine the Fed’s statement and guidance. If policymakers signal that more hikes are possible, stocks could come under pressure as the market reprices borrowing costs, earnings expectations and corporate investment.
If the hike comes with softer guidance, however, traders could look beyond the immediate tightening and focus on the possibility that the Fed is nearing the end of its hiking cycle. That could produce a relief rally even though rates moved higher.
Credit markets add another layer of risk. The cost of insuring bonds issued by AI companies has been rising, suggesting financial stress may already be building beneath the surface. A hike could amplify that pressure, particularly in rate-sensitive and heavily leveraged areas of the market.
2 Surprise Scenarios
If the Fed leaves rates unchanged, the expected hike would need to be unwound. Stocks could initially rally, but traders would immediately ask why policymakers paused and whether the decision reflects concern about economic or credit conditions.
A surprise rate cut would create the largest disconnect from expectations. The first move could be sharply higher, but that reaction might reverse if investors conclude the Fed sees economic weakness or financial stress that the broader market has missed.
Here’s the bottom line: A 92.7% probability identifies the expected decision. It does not predict the direction, size or durability of the market’s reaction.
Don’t treat a high-probability event as a low-risk event. The biggest move may come after the announcement, when the market starts pricing in what the Fed’s decision actually means.
Kane Shieh
Kane Shieh Trading
Follow along and join the conversation for real-time analysis, trade ideas, market insights and more!
Important Note: No one from The TradingPub team or Kane Shieh Trading will ever contact you directly on Telegram.
*This is for informational and educational purposes only. There is inherent risk in trading, so trade at your own risk.
