Will the recent spate of market volatility make the Federal Reserve less willing to raise rates? It's a case made by many market participants, and it appears to be somewhat supported by 20 years of market data.
Going back to August 1995, the central bank has never raised its target on the key federal funds rate while the CBOE Volatility Index has been as elevated as it is now.
The VIX—which measures traders' expectations of future volatility and closely tracks recent volatility—closed at 25.61 on Thursday. And a CNBC analysis of FactSet data shows that the Fed has never increased rates while the VIX has been above 25. In fact, the average level of the VIX when rates have been raised is just 15.7, which is below the long-run average of about 20.
One might initially think the absence of rate hikes in the midst of a high VIX is a predictable coincidence, given that the Fed has raised rates on less than half a percent of market days, while the VIX has closed above 25 less than a quarter of the time. But this is where a peek at the opposite condition adds critical context.
The average VIX reading when the Fed has cut rates is 28.5. And less than half of the last 27 cuts have come on days when the VIX closed below 25.