Trade the FOMC: How stocks tend to perform on Fed hike days

Citi has analyzed market behavior on the days of Federal Reserve rate hikes, ahead of today's decision, which its economists anticipate. The bank observed that the initial hike was not uniformly unfavorable for stocks, as markets generally absorb most of the tightening risk beforehand. Over the past seven instances of the first hike, U.S. equities experienced four upward movements, while bonds, gold, and currencies exhibited no discernible trend.

Based on their analysis, Citi identified a typical pattern surrounding Federal Reserve meetings: equities generally exhibit a positive response to the initial statement, but this reaction typically reverses after the press conference concludes, resulting in a slight decline of approximately 10 basis points by the end of the day.

Gains in equities five minutes after the FOMC statement are often negated following the press conference, whereas initial declines tend to persist until the market closes.

For Treasuries, the bank noted that the initial market reaction to the statement tends to be the most pronounced during the session, with yields generally reverting to the mean before the market closes, despite potential multi-day follow-through. Over the past 12 meetings, Citi found that returns have been inconsistent, with equities demonstrating a more pronounced negative reaction in several recent decisions.

The bank emphasized that intraday moves are often influenced by broader news flow, including the tone of the subsequent press conference, rather than the rate decision itself.