I had the same problem on my 96 855R. Volvo did a complete redesign of the ABS/TRACS system for the 850 starting with the 96 model year, this redesign placed the ABS controller right under the brake modulator, and as it was explained to me "over time vibrations from the brake modulator can and will cause micro fractures in the PCB of the ABS controller which causes temporary signal loss and the system to fail sporadically..." While this doesn't affect normal braking, when the ABS/TRACS OFF lights are on the ABS and TRACS will not function.

One other possibility that happened on a friend's 95 850 GLT is the electrical connections to the key ignition are failing. An easy way to test if this is the case is with the ABS/TRACS lights on (and the car started), gently twist the ignition key back slightly, not enough to turn the car off but just before the accessory position, if it's the ignition, when you do this the ABS/TRACS lights will turn off.