After months of smooth sailing and breakouts to the upside, the market was hit with a round of volatility this week.

On Wednesday, the Federal Reserve decided to cut interest rates by a quarter of a point. This was widely expected.

But what spooked the markets was the “dot plot.” 

This is the Fed’s outlook for rates in 2025. In it, they reduced the amount of anticipated rate cuts next year.

The “dot plot” spooked the markets as it indicates higher rates for longer than previously forecasted.

Let’s take a closer look to see why this simple forecast caused a volatility spike in the market.

Two Scenarios, One is Spooking Markets

A quick refresher. 

The Fed lowers interest rates to support a weaker economy and stimulate growth.

The Fed increases rates to slow the economy and battle inflation.

Rates are simply a tool to battle price stability and create economic growth. 

With a higher rate forecast for 2025, it indicates two things. First, that the economy is stronger than previously thought, therefore the additional rate cuts wouldn’t be needed. Typically, this is viewed as a bullish indicator being a strong economy, but the knee-jerk reaction by higher interest rates is negative. 

So, we may get a sell off, but then a rally will follow.

The second is that they may still have an inflation problem. 

It’s the latter that has markets jumpy.

Inflation has been a battle since the pandemic-related economic shutdown, and stimulus that followed, caused a surge in inflation. The Fed began raising interest rates in 2022 to combat inflation and felt they had it under control as they began to cut rates in September of this year.

Based on the market reaction, there’s some serious concern the Federal Reserve does indeed have it under control.

To Buy the Dip, or Fade the Bounce

After the sharp market slide hit the broad markets, the question everyone is faced with is it time to buy the dip, or should you fade a bounce?

Going back to check similar spikes of volatility and how the market reacted tells us it could be a bit of a mixed reaction.

Buying the dip can pay off, depending on the size of the bounce.

But knowing when the add a bearish trade after the bounce is key to making profits on the next push lower.

One thing typically follows a spike like this though, and that’s an increased level of intra-day volatility. 

We can expect sharper swings in the market over the next few weeks, making it a trader’s paradise to buy and sell on short-term reversals. For investors, well, you just have to stomach the churn for a few weeks before the new trend takes shape.

Market Traders Institute offers the tools and insights to navigate these turbulent markets with confidence. 

Whether you’re buying the dip or fading the bounce, our resources can help you stay ahead of the curve and make the most of every trading opportunity.

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