How to Prepare for a Fed Announcement

09/22/2009 12:01 am EST

Focus: STRATEGIES

S. Wade Hansen

Co-Founder, Profiting with Forex (PFX) and Learning Markets

Fed watchers don't anticipate anything revolutionary from the FOMC on Wednesday, but the meeting is still going to be watched carefully. The FOMC can raise or lower rates at these meetings, but expectations are that the Fed funds target rate will be left alone at 0% - .25%. Despite the probability that rates will be left alone, the buzz around the announcement could create some additional volatility for the S&P 500 (.INX) and the Dow Jones Industrial Average (.DJI).

Traders will be watching the S&P 500 (.INX) and the Dow Jones Industrial Index (.DJI) on Wednesday to monitor the market's reaction to the Fed announcement. This release is much more than just a renewal of the Fed funds target rate, which is unlikely to change from 0%. If the Fed's comments about the statement are more hawkish relative to inflation, that would represent a significant change in Fed speak and could send stocks back down.

The Fed is the largest single participant in the financial markets and sets the tone in many ways for how attractive stocks or bonds will be in the near term. Higher interest rates may be needed to fight inflation, but it will also increase the cost of capital and could turn into a significant drag on the early recovery.

Because of the significance of the Fed's influence in the market, traders are well served to make sure they understand how it works, how it communicates, and when it takes action. Understanding what the Fed does will help your long-term forecasting and help you determine the right mix of asset classes within your portfolio.

By S. Wade Hansen of LearningMarkets.com

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