Q: The Federal Reserve has met twice this year and hasn't changed interest rates at either meeting. Despite this, the stock market jumped higher after both events. Why?
The actual interest rate decision is often not the biggest news item to come out of the meeting. More often than not, investors have a pretty good idea of what to expect.
Continue Reading Below
Barring a surprise interest rate move, market participants are generally more interested in what the policy-setting Federal Open Market Committee (FOMC) sees going forward. Specifically, there are three pieces of information that are released along with interest rate decisions that can move stocks.
At the conclusion of every meeting, the FOMC releases a statement explaining its interest rate decision. Few documents in the world are as dissected as this, and seemingly minor language changes can cause stocks to rise or fall. For example, a primary reason for the market's jump after the January meeting was the addition of the word "patient" to the statement in the context of future rate hikes.
In addition, at four meetings per year (March, June, September, and December), the Fed releases its outlook for economic data like GDP growth, unemployment, and inflation, as well as its "dot plot," which tells us where Fed officials see rates heading. If any of this information is surprisingly positive or negative, it can move the market. At the March meeting, the big reason for stocks' initial pop was a change in the dot plot from two projected rate hikes in 2019 to none at all.
In short, there's a lot more to Fed meetings than just interest rate decisions. While Fed officials don't have a crystal ball, their predictions are closely watched by investors.
Offer from The Motley Fool: The 10 best stocks to buy nowMotley Fool co-founders Tom and David Gardner have spent more than a decade beating the market. In fact, the newsletter they run, Motley Fool Stock Advisor, has quadrupled the S&P 500!*
Tom and David just revealed their ten top stock picks for investors to buy right now.
*Stock Advisor returns as of Jan. 31, 2019.
The Motley Fool has a disclosure policy.