Friday's Market Minute: The Fed And The VIX?!

The Fed’s annual Jackson Hole symposium was virtual this year, but that did not mean any less importance for markets. Jerome Powell, the Fed’s chairman, announced changes to the central bank’s framework in a major policy change. He referred to the changes as a “robust updating” of Fed policy as the central bank formally agreed to a policy of “average inflation targeting.” The Federal Reserve said it plans to keep rates near zero even after inflation has exceeded its 2% target level. The change means the Fed is prepared to tolerate a higher level of inflation than it generally has in the past, even though it has been below 2% for years. In addition to the shift on inflation, the Fed also announced a policy tweak that changes the approach to employment. Powell said the Fed will not set a specific goal for the unemployment rate but rather will allow conditions to dictate what it considers full employment.

Stocks enjoyed the Fed’s decision as the S&P 500 and Nasdaq hit more all-time highs, but volatility also rose to three-week highs. The closely watched CBOE Volatility Index (VIX) is up over 10% this week even as stocks continue to rise. What is the VIX telling markets? It may be a short-lived rally for the VIX if stocks continue to rise, but my gut is telling me it may be signaling additional uncertainty for equities. The VIX is priced on short-term option purchases in the S&P 500 options, so maybe investors are hedging the recent gains in their portfolios, which would be a prudent move during the massive rebound in stocks. Time will tell, but once again investors should be wary of the market’s “Fear Gauge.”

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