FOMC & CPI Analysis: How Much Does the Fed Move the Market?

Justin Nugent

This article was last updated on 09/26/2022.

FOMC

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Fast Fed Facts

  • Fed Day = Red Day? 60% of all Fed-influenced events in 2022 have resulted in negative S&P 500 closes
    • When only closes >±1% are considered, 54.5% of S&P 500 closes were negative
  • The average absolute move on Fed-influenced days in 2022 is ±1.82%
  • FOMC meetings often yield larger S&P 500 moves (±1.88%) than CPI reports (±1.60%)
    • However, the largest Fed-influenced market reaction came from the August CPI report, which sent the S&P 500 more than 4% lower in a single day
    • The second largest Fed-influenced market reaction came from the annual Jackson Hole Economy Symposium, where Fed Chair Jerome Powell warned of “pain for households and businesses”
  • Traders could have achieved positive YTD performance in 2022 by simply buying ATM straddles in near-dated SPY options on the day before Fed-influenced events.

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“The Fed Controls the Market”

How often have you heard a version of this sentence in 2022? Finance TV is littered with pundits speaking ad nauseam about the many ways in which Fed policy could affect the market. Despite hundreds of highly educated voices chiming in on FOMC rate hikes, CPI inflation data, Powell and more, somehow none of them really agree with each other.

Inflation risk suggests a 100 basis point rate hike is likely, says Nomura
If Fed hikes 100 basis points it would be ‘shocking’ to the market, says David Rubenstein

A 75 basis point rate hike by the Fed is ‘locked and loaded’ says OCBC Bank
Fed expected to hike by 75 basis points, but it’s the forecast that matters most

Powell Is Not About to Go All Volcker on Rates at Jackson Hole, Says Goldman
Will Powell have to go full Volcker?

The Fed Is About to Go Full Throttle on QT.
The Fed Is About to Ramp Up Balance-Sheet Shrinkage. It May Get Dicey.

Imagine this, but for 24 hours a day on TV. 

The truth is, even the smartest people in the room don’t really know what effect Fed tightening will have on the market. For traders, trying to debate those nuances is an exercise in futility. In other words, it doesn’t matter what you think should happen to the market — it matters what is happening to the market.

To help traders figure out what is happening, Market Rebellion analyzed the stock market reaction to every Fed-influenced day in 2022. For this study, we included S&P 500 reactions to each of the FOMC meetings, all of the CPI reports, and the yearly Jackson Hole Economic Symposium in our data field. The results were surprising, and they may help you to craft tactical option trades based around historical data.

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Market Reaction to FOMC

The FOMC conducts eight regularly scheduled meetings per year where they discuss themes like the Fed Funds Rate, inflation, the labor market, and broader monetary policy. On years where the Fed isn’t in focus, these meetings largely go unnoticed. But in 2022, these FOMC meetings have generated some of the largest intraday moves of the year. While the annual Jackson Hole Economic Symposium is not actually an FOMC meeting day, it is a day where key Fed officials meet prior to a speech from Fed Chair Jerome Powell — and in 2022, it generated a massive market reaction.

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Market Reaction to CPI

The CPI report is a monthly measure of the price of consumer goods and services. The CPI report is frequently used to quantify inflation. While the CPI report isn’t directly a “Fed day”, these key inflation reports often set the tone for Fed officials, most of whom view combating inflation as their main objective in 2022. Simply put, soaring inflation leads to hawkish monetary policy — the market doesn’t like that. 2022’s focus on the Fed has led both the FOMC and the CPI report to become the catalyst for many high velocity bouts of market volatility. We’ve quantified those results in the infographic below.

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VISUALIZED: FOMC vs CPI — Market Reactions

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Key Takeaways

  • The FOMC typically generates positive day-of returns (+1.22%, or +0.56% if including Jackson Hole)
  • The CPI report typically generates negative day-of returns (-1.07%) 
  • The FOMC typically leads to larger overall market moves (±1.88%) than the CPI report (±1.60%)
    • As a result of these outsized intraday moves, the FOMC is often preceded by high IV options
  • The average market move of these 16 Fed-influenced events was ±1.82%.

While analyzing the data, we backtested an options trading strategy in which the shortest dated at-the-money straddle was purchased in the SPDR S&P 500 ETF (SPY) at the close on the day before each Fed event. The result:

Unusual Options Activity
Learn how we make technical trades based on smart money moves inside this free video.

At-The-Money 1-2DTE SPY Straddles Bought Before Fed Events Handily Outperformed the S&P 500 in 2022

CPI
Source: TradingView, Market Rebellion

Most years, the stock market couldn’t care less about what the Fed is saying or doing. 2022 is not most years. Particularly as 2022 progressed, and as the market continued to fall, S&P 500 reactions to Fed-related events have grown in size. As a result, traders could have simply used the leverage of options to make market-neutral, long-volatility predictions using the shortest-dated SPY options available. It would have cost traders $103.24 to buy all 16 of the pre-CPI, pre-FOMC straddles in 2022 (Updated as of 9/22). However, if held until the close of the Fed-related day, they would have gained a cumulative return of +$21.47, or an average profit of $1.34 per straddle. That’s a YTD return of +20.8%, outperforming the S&P 500 by +42.46% YTD. Again, this strategy would probably not work in most other years — but with all eyes on inflation, it has paid to be long volatility ahead of 2022’s Fed-related events.

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