The VIX and the Fed

As we saw at the beginning of August, the markets have become more volatile as we head into the Fall. This volatility is measured by the VIX, or the Chicago Board Options Exchange Volatility Index. For most of 2024, the VIX had traded between 12 and 15, but on August 5, the VIX spiked to 65 during the day.

In my 40-year career, I have only seen the VIX trade this high on a few occasions: the Great Financial Crisis and the COVID-19 pandemic crisis. This panic-selling prompted the pundits on Wall Street to call for the Fed to immediately cut 50 basis points from interest rates.

Today, the question isn’t about the Federal Reserve cutting short-term interest rates at their September meeting, but by how much and why. Will Federal Reserve Chairman Jerome Powell still be able to engineer a soft landing for the American economy? Or are we headed for a hard landing?

These terms were used to describe whether the United States could avoid a recession after 11 interest rate increases starting in 2022. Since Powell is the chair of the Federal Reserve, he is the pilot, and the plane is the U.S. economy. We certainly all know the difference between a soft or smooth landing when we fly, and we sure feel it when there is a lot of turbulence and a hard landing. We are hitting some turbulence now and will only know what kind of landing Powell will engineer over the next three to six months. Let’s hope it is one we like.

Stock Market

The markets have been counting on Powell to make this soft landing since the beginning of the year, and with the continued improvement on the inflation front, stock investors are quite bullish. The S&P 500 Index is up 18% YTD. The Fed’s mandated inflation target is 2%, and inflation is currently running right around 3%. The problem now for the Fed is the rising unemployment rate. It has gone from a July 2023 low of 3.4% to 4.3%. In his Jackson Hole speech, Jerome Powell stated, “We do not seek or welcome further cooling in labor market conditions.” If the unemployment rate continues to move much higher, investors are going to be calling for larger and faster interest rate cuts by the Fed.  Higher unemployment could signal to the markets that the plane is coming in for a hard landing and that the economy is in a recession or headed for one.

September 18, 2024

This is the date that we predict the Fed will announce either a 25-basis point or 50- basis point cut in short-term interest rates. Today, the Fed Funds futures are predicting only a 25-basis point cut. The difference between the two moves is why the Fed is between a rock and a hard place. If they only cut 25 basis points, does that mean the Fed is still worried about inflation? Or if they cut rates 50 basis points, does that mean the Fed is behind the 8 ball and is worried about a recession?  There will be another jobs number as well and two more inflation numbers before their meeting to help them decide what to do. For now, the market is betting on a soft landing, but as we saw on August 5th, turbulence can hit at any time. For the time being, be sure to fasten your seat belts.

Fred Taylor is a Partner, Managing Director at Beacon Pointe Advisors LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information.