When the Federal Reserve meets, many wonder, “How will the market react?” The market often makes quick moves after these announcements. However, a more important question is how these market changes relate to your investment plan. For long-term investors who hold quality stocks for five years or longer, short-term fluctuations from the Federal Open Market Committee (FOMC) don’t really matter. These investors stick to their strategy, regardless of market ups and downs. On the other hand, short-term traders need to prepare for potential market shifts instead of trying to predict them.

Risk Management Strategies

The key focus should be on managing risk and dealing with unexpected market changes. For example, if you have a stock that has doubled in value, selling 15% of it can lock in profits while still allowing for future growth. Traders should think about their strategies, the risks they face, and actions that will be valuable no matter what the market does. Major events, like FOMC meetings, can cause market volatility but are not guaranteed chances for profit. Successful market players plan for worst-case scenarios and protect their current positions before chasing new opportunities. The essential question isn’t what happens next, but why you’re interested and how best to proceed. Instead of trying to predict the outcome of the FOMC meeting tomorrow, we should focus on positioning ourselves for any market movements. The situation is uncertain. According to the CME FedWatch Tool, there is about a 60% chance of the Fed pausing changes and a 40% chance they will raise rates. We need a plan that prepares for both possibilities. Implied volatility is high, with the VIX around 19, indicating that options are pricier at the moment. We’ve seen this happen before, especially during the Fed’s aggressive rate hikes in 2022 and 2023, when uncertainty builds up before announcements. Often, after the Fed speaks, this uncertainty fades rapidly in what we call a “volatility crush,” which can hurt those who bought options at high prices.

Post Meeting Strategy

This suggests considering strategies that profit from a decline in volatility, such as selling iron condors or credit spreads on major indices. For those wanting to take a directional bet, using debit spreads can help define risk. This way, an unexpected market move doesn’t completely harm your position, and a volatility crush impacts you less negatively. Once we know the outcome of tomorrow’s meeting, we should quickly turn our attention to the next data points. The recent August CPI report, which showed a higher-than-expected inflation rate of 3.6%, reminds us that the fight against inflation is still ongoing. The market’s response to upcoming employment and inflation data in the following weeks will influence the next FOMC meeting in November. Create your live VT Markets account and start trading now.

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