How to Handle Your Positions Around a Central Bank Rate Decision

The Federal Open Market Committee publishes its meeting calendar well in advance. That makes a rate decision one of the few big market events you can see coming, down to the day, and the calendar is the first thing to check when you hold positions through the weeks around it.

A scheduled event is still a risky one. The decision, the statement that comes with it and what is said afterward can all move prices, in either direction, and this page is about process only. It makes no call on what any decision will be or how stocks will take it.

Before the release

Find the time. The FOMC calendar gives the meeting dates, and the Federal Reserve announces when the statement will be released and when a press conference will follow. Put both in your own calendar in your own time zone. While you are there, check what else falls in the same days, since an earnings report from a stock you hold or a major data release in the same week stacks two events on one position, and the combined move is harder to plan for than either would be alone.

Then decide on size. A decision can move a stock further in a few minutes than it moves on a quiet day, so the stop that suited your position last week may be too tight for the release. You have two honest choices. Keep the stop and accept a higher chance of being taken out by noise, or widen it and cut the position so the dollar risk stays the same, which is the arithmetic below.

Whatever you choose, choose it in advance. A stop you plan to place in your head once the move starts is the kind that mental stops fail warns about.

Last, look at the quote. Bid-ask spreads often widen as the release approaches, because liquidity providers pull back from the book when they cannot know what the next minute holds. Check the spread on each stock you hold shortly before the release time.

While the news lands

The first move can reverse. Prices react to the headline number within seconds, then react again as traders read the statement, compare it with expectations and reprice, and that second reading can undo the first entirely, so a stock that jumps in the opening minute has told you very little about where it will be at the close.

Avoid market orders into a thin book. With wide spreads and few resting orders, a market order can fill well away from the last price you saw. Use limit orders if you must trade. Better still, wait a few minutes.

Stops behave differently too. Once triggered, a stop order turns into a market order. In a fast move that can mean a fill below your stop price, the situation covered in why your stop sold below your stop price. A stop-limit order caps the price, at the cost of possibly not filling at all.

After the statement

The decision is not the end of the event.

When the Chair holds a press conference, answers to questions can shift how the market reads the decision, and prices can move again long after the statement. The wording of the statement itself matters as well. A small change in language about the path of future rates can matter more to prices than the decision, which is explained in hawkish and dovish, and why markets react to wording.

Treat the whole session as the event. Some traders also watch the minutes, published some weeks after each meeting, since they add detail about the committee’s discussion.

A short checklist

• Release time confirmed.
• Press conference time confirmed.
• Position sized to the stop you will actually use.
• Stops placed as real orders.
• Spreads checked just before the release.
• No market orders during the first minutes.
• A decision on whether to trade the press conference, made in advance.

None of this predicts anything. It keeps a scheduled event from turning into an unplanned loss.