The Federal Reserve's recent hawkish rate cut has injected a wave of uncertainty into the financial markets, leading to a notable increase in equity volatility. The Fed's decision to lower rates by a quarter point, while signaling only two additional cuts for 2025, has prompted a reassessment of monetary policy expectations. This cautious stance has resulted in a significant rise in the policy-sensitive two-year US Treasury yield, which climbed over 10 basis points to approximately 4.35%. The higher yields have made bonds less attractive, contributing to a sell-off in both the stock and bond markets.
The strengthening US dollar, driven by the allure of higher yields, has further compounded market volatility. As the dollar appreciates, USD-denominated assets become more appealing to foreign investors, while alternative assets like gold have seen a decline in attractiveness. This environment of heightened uncertainty and risk is reflected in the increased volatility index, which has reached its highest level since August.
The CBOE Volatility Index (VIX), a key measure of market volatility, has surged to 27.71 as of 16:37 on December 18, up from its last close of 15.87. This spike underscores the market's reaction to the Fed's cautious approach and the broader implications for future monetary policy adjustments.