JPMorgan’s FOMC Reaction Matrix: What Markets Expect on Fed Day

The Federal Reserve’s upcoming policy decision has investors on edge, with outcomes ranging from a surprise hike to a deeper rate cut. JPMorgan’s latest FOMC Reaction Matrix lays out probabilities for each scenario, along with potential impacts on the S&P 500. Here’s the breakdown:

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1.0% Probability – Fed Hike

• Market Reaction: S&P 500 falls 2%–4%
• Analysis: This remains the least likely outcome. While Core CPI has risen three months in a row, the 3-month average of 0.30% MoM (3.64% annualized) isn’t hot enough to force a hike—especially as tariff policy may push the Fed toward a dovish inflection.

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4.0% Probability – Fed Holds (Pause)

• Market Reaction: S&P 500 down 1%–2%
• Analysis: Another tail risk. A pause would have required both a stronger NFP and a hotter CPI print, neither of which materialized. Powell’s Jackson Hole comments also leaned away from this outcome, making it less credible.

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40% Probability – Hawkish 25bp Cut

• Market Reaction: S&P 500 flat to down 0.5%
• Analysis: The market debate will center on Powell’s tone. Inflation is rising at a slower pace, with YoY trends around 2–3% seen as manageable. However, Fed commentary suggests labor market weakness is the bigger concern. If Powell sounds more hawkish, it could cap market gains despite the cut.

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47.5% Probability – Dovish 25bp Cut

• Market Reaction: S&P 500 gains 0.5%–1%
• Analysis: The base-case outcome. With inflation viewed as transitory and labor market risks still contained, the Fed may lean toward a gradual cutting cycle. Markets would welcome this as confirmation of a data-driven, accommodative stance.

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7.5% Probability – 50bp Cut

• Market Reaction: S&P 500 could swing –1.5% to +1.5%
• Analysis: The widest range of outcomes. A negative reaction would signal fears the Fed is panicking about the labor market, while a positive move would reflect confidence that the Fed is simply catching up to economic realities as hiring slows and NFP risks turning negative.

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Final Takeaway

The matrix highlights that the Fed is unlikely to surprise markets with a hike or a pause. Instead, the focus is squarely on the nuance of a 25bp cut—whether Powell frames it as cautious and hawkish, or gradual and dovish. For traders, the difference between flat markets and a modest rally may come down to a single line in Powell’s press conference.