Deutsche Bank sees Fed meeting volatility risk for stocks

Deutsche Bank analysts have identified a pattern of stock market volatility and weakness surrounding Federal Reserve policy meetings, particularly during periods of rapid rate hikes. According to their analysis of the 2022 rate tightening phase, US equities experienced declines during nearly every Federal Open Market Committee (FOMC) week in the early months of the cycle, as noted by a team led by Parag Thatte.

The strategists observed that market behavior shifted once the Fed transitioned to a slower pace of rate increases, with stock volatility decreasing and equities rallying during FOMC weeks towards the latter stages of the hiking cycle. The primary concern for equities, the strategists wrote, was the volatility triggered by frequent changes in Fed guidance and the rapid pace of rate hikes, rather than the hikes themselves or the higher interest rate level.

The Federal Reserve's rate decision is set for Wednesday, with swaps traders currently pricing in roughly a 90% probability of a rate hike. Deutsche Bank has observed a recurring pattern in this year's FOMC meetings, where stocks typically rise modestly in the two days prior to the rate decision, but equities tend to decline by a median of 1.2% on the day of the announcement, only to recover and close the week higher by an average of 0.9%.