Federal Reserve's Interest Rate Decision: What to Expect

26-07-2023

The Federal Reserve will reveal its interest rate decision later today (26-07-23). Most investors anticipate a quarter-point hike, which would place the benchmark rate within a 5.25% to 5.5% range, the highest since 2001.

The financial markets will analyse the central bank’s future guidance to determine if this rate increase will signal the cessation of the Fed’s 16-month tightening regimen, or if we can expect another rate hike in September.

Jay Powell, the Fed chair, is “likely to underscore the need for additional proof before being confident that inflation will be controlled,” according to Deutsche Bank macro strategist, Henry Allen.

This policy meeting happens a day after a U.S. Conference Board survey indicated that consumer confidence had reached its highest in two years in July. This suggests that the U.S. economy continues to show resilience despite the rising borrowing costs.

If you would like to position yourself around this event you could consider trading zero days to expiration (0DTE) iron condor. This is a high-risk, high-reward strategy that could be used around significant events like a Federal Reserve decision on interest rates.

An iron condor strategy involves selling a call spread and a put spread on the same underlying asset with the same expiration date. Here’s a basic idea of how you could implement this strategy:

1. Identify the underlying asset: First, determine which asset you believe will be most affected by the event. In the case of a Fed decision, this might be a broad market index like the S&P 500 or an ETF.
2. Sell a call spread: This involves selling a call option at a certain strike price and buying another call option at a higher strike price. The aim is to profit from the premium received if the price of the underlying asset stays below the lower strike price.
3. Sell a put spread: This involves selling a put option at a certain strike price and buying another put option at a lower strike price. The aim here is to profit from the premium received if the price of the underlying asset stays above the higher strike price.
4. Monitor the market: Once the iron condor is set up, monitor the market closely. If the underlying asset’s price stays between the two spreads’ strike prices, all the options will expire worthless, and you’ll keep the premium received from selling the spreads. If the price moves outside this range, you could face losses, which are theoretically limited to the difference between the strike prices minus the premium received.