Panic Index Predicts "Fed Put" Unlikely to Repeat
One Wall Street analyst said that history shows that a decrease in stock market volatility does not meet expectations of interest rate cuts.
A Wall Street analyst warned on Wednesday that investors are once again betting on a Fed rate cut, but have not received any evidence from the closely watched volatility index of the stock market.
According to Dow Jones market data, the Cboe Volatility Index or Panic Index (VIX) closed at its lowest level since January 3, 2022, far below its long-term average level of around 20.
The current problem is that the interest rate market shows that traders believe there is a 93% chance (considered about 86% likely) that the Fed will raise interest rates again in May and then cut them later this year.
Nicholas Colas, co-founder of DataTrek Research, said history shows that the Fed only cuts interest rates when geopolitical shocks or imminent economic recessions cause rapid volatility in US stocks.
"For us, this is a real 'Fed put'," Colas said.
As we all know, the concept of the Fed put is that when the stock market crashes, monetary policy makers will cut interest rates and take action to save the market.
So far, the VIX has not provided any signs that the Fed may cut interest rates.
Colas said the Fed often (but not always) cuts interest rates when the volatility index soars, including after Iraq invaded Kuwait in 1990, during the Asian crisis in 1998, entering the economic recession in 2002 and 2008, and during the COVID-19 pandemic in 2020.
There are also exceptions. During the dot-com bubble in the 1990s, there were higher, not lower, federal funds rates.
Last year's rise in the VIX index was another example, as Fed Chairman Powell and Fed policy makers sought to reduce consumption and investment while embracing stock market volatility.
As volatility expectations decline, the stock market has seen directionless trading at the start of the first quarter earnings season.
According to Dow Jones market data, all indices rose by less than 0.1% on Tuesday, the first time since November 15, 2021 that the gains of these three indices on the same trading day were less than one-tenth.