Deutsche Bank Highlights Stock Volatility Risk Around Fed Meetings

A historical analysis by Deutsche Bank strategists suggests that U.S. equities face a heightened risk of volatility and declines surrounding Federal Open Market Committee (FOMC) policy announcements, especially during aggressive monetary tightening cycles.

The 2022 Tightening Cycle

In a note to clients, a team led by strategist Parag Thatte pointed to the Fed's 2022 rate-hiking campaign as a key precedent. The analysis found that during the initial, rapid phase of that cycle, U.S. stocks fell during nearly every FOMC meeting week.

However, the market's behavior shifted once the central bank moderated the pace of its rate increases. In the later stages of the hiking cycle, stock volatility eased and equities tended to rally during FOMC weeks. "The key issue for equities was the volatility created by frequent changes in Fed guidance and the speed of hiking, not the hiking itself nor the higher level of rates," the strategists wrote.

A Predictable Weekly Pattern

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Deutsche Bank also identified a recurring trading pattern around FOMC meetings this year, providing a potential roadmap for investors navigating the upcoming policy decision.

• Stocks typically post modest gains in the two days leading up to the announcement.
• On the day of the decision, equities experience a median decline of 1.2%.
• The market then tends to recover, closing the week with an average gain of 0.9%.

Market Expectations

This analysis comes as the Federal Reserve prepares for its next interest rate decision, scheduled for Wednesday. According to the source material, swaps traders are pricing in a high probability of another rate hike, with current odds standing at approximately 90%.