JACKSON HOLE, WYOMING – AUGUST 22: Federal Reserve Chairman Jerome Powell is seen walking in Grand Teton National Park on August 22, 2025 near Jackson Hole, Wyoming. Powell spoke Friday at the annual Jackson Hole Economic Symposium. (Photo by Natalie Behring/Getty Images)
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In a highly anticipated event for global markets, the U.S. Federal Reserve’s Open Market Committee is set to meet on September 16-17. Current market positioning suggests a strong expectation of a 25-basis-point rate cut among analysts.
While the market seems to be factoring in this particular outcome, a closer examination of historical trends reveals an intriguing pattern: the Federal Reserve has occasionally delivered policy surprises that overturn conventional expectations. If the committee opts to maintain the current rate, this unforeseen choice could trigger substantial market volatility. Our assessment of historical precedents indicates that such an occurrence could result in a market downturn of up to 8%.
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The Fed’s History of Crushing Market Expectations
Recent history illustrates that when the Federal Reserve’s policy announcements have been more hawkish than expected, the S&P 500 has undergone significant corrections. The S&P 500 levels mentioned below are as of the trading day prior to the beginning of each FOMC meeting, establishing a clear baseline for the market’s response.
September 20-21, 2022: In reaction to persistent inflation, the Fed’s aggressive approach caused an 8% drop in the S&P 500, which fell from 3,900 on September 19 to 3,586 by September 30. This marks the most extreme market reaction within the observed timeframe.
December 12-14, 2022: Market participants had priced in a possible policy pivot, with the S&P 500 sitting at 3,991. When the Fed did not indicate a shift toward easing, the index declined 4.6% to 3,808 by January 5, 2023.
July 25-27, 2023: Despite a phase of relative market calm, the Fed’s sustained hawkish messaging resulted in a 4.1% market decline, with the S&P 500 dropping from 4,567 to 4,380 by August 18.
December 16-18, 2024: Even though the Fed executed an anticipated rate cut, its hawkish forward guidance spurred a 3.9% selloff. The S&P 500 fell from 6,074 to 5,836 by January 13, 2025.
Across these cases, the average market downturn following a hawkish surprise from the Fed has been about 5%.
Current Market Vulnerabilities
The current market landscape might be especially vulnerable to a policy letdown due to several factors:
High Valuations: Elevated trading levels of the S&P 500 could intensify the consequences of any adverse surprises. Curious about how severe the downturns can be? Our dashboard – How Low Can Stocks Go During A Market Crash – illustrates how key stocks fared during and after the last seven market crashes.
Investor Expectations: Widespread anticipation of rate cuts has made the market sensitive to any deviation from this agreement.
Asset Positioning: Considerable institutional investment in duration-sensitive assets could heighten selling pressure if expectations around rates shift.
Potential Scenarios
Two main scenarios can be evaluated based on historical data:
Base Case Scenario: A minor surprise, such as the Fed retaining current rates when a 25-basis-point cut is anticipated, could result in a correction aligned with the historical average of around 5%.
Stress Case Scenario: If the Fed not only refrains from a rate cut but also maintains a hawkish stance, a more drastic market reaction could unfold, potentially nearing or surpassing the 8% maximum decline witnessed in September 2022.
Considering these historical trends, investors might contemplate positioning themselves for potential volatility. Strategies could involve focusing on sectors likely to benefit from higher-than-expected rates, such as financials, and employing options to hedge against downside risk. The recurring market corrections that follow Fed policy disappointments since 2022 highlight the necessity for risk management in the prevailing environment. For example, the Trefis High Quality portfolio has successfully outperformed the S&P 500 while sidestepping much of this Fed-induced turmoil, achieving cumulative returns exceeding 91% since its inception—a stark contrast to the volatile experience of broader market indices.