It's almost time. The Federal Reserve is set to meet this week, with the central bank expected to lower its overnight rate. The question for investors, however, is how much the Fed will ease monetary policy. Traders are pricing in a 96% chance of a quarter percentage-point rate cut, per the CME Group's FedWatch Tool. They see just a 3.8% probability of a larger half-point reduction. But how the market reacts could also depend on the tone given by the central bank. If the Fed cuts and gives a more dovish outlook on rates, stocks are likely to go higher. If it lowers rates but tamps down expectations for future reductions, the S & P 500 could be under pressure. JPMorgan's trading desk broke down five Fed decision scenarios, with their likelihood and potential market impact: 47.5% chance: "Dovish" quarter-point cut — The S & P 500 would gain between 0.5% and 1% under this outcome. "It is possible that with a transitory view on inflation that the Fed sees the labor market as being far away from having an inflationary impact on the economy and thus has some room to cut," the traders said. 40% chance: "Hawkish" quarter-point reduction — The traders see the S & P 500 trading between flat and down 0.5%. "Fedspeak points to the labor market being the bigger concern than inflation and with data pointing to hiring inflecting higher (Small Biz survey, Indeed listing, etc.) this could lead to a more hawkish Powell than expected," they said. 7.5% probability: Fed cuts by a half point — This scenario has the widest potential outcome for the market, with traders expecting the S & P 500 to trade between a 1.5% decline or gain as much as 1.5%. A market decline, they said, would come if the Fed signals they are more worried about the labor market than previously indicated. A gain would arise if the Fed "sees itself as needing to catch up to the economic realities of a labor market on the precipice of rolling over." 4% probability: Fed holds rates steady — The Fed keeping its benchmark rate at the current 4.25% to 4.5% range is not on traders' bingo cards. But, if this were to happen, the S & P 500 would drop 1% to 2%, JPMorgan's trading desk said. 1% chance: Fed raises rates — This other completely unexpected outcome would spark a major sell-off in equities, with the S & P 500 losing 2% to 4%, per JPMorgan traders. "Given that Core CPI MoM has increased 3 consecutive months, this will give the Fed pause but the CPI print was not hot enough to make this a credible threat." The Fed will begin its meeting Tuesday. On Wednesday, it will deliver its policy decision, followed by a news conference with Chair Jerome Powell. ( Learn the best 2026 strategies from inside the NYSE with Josh Brown and others at CNBC PRO Live. Tickets and info here . )
