High VIX, no hike? What market history tells us

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.

A week ago on CNBC, Federal Reserve Vice Chair Stanley Fischer said that market volatility "does affect the timing of a decision you might want to make."

Fed's Fischer: Too early to decide on Sept hike

Fischer, like many investors, looked to global markets as the cause of the rocky moves. According to Larry McDonald, head of U.S. strategy at Societe Generale, that's the real problem—the reason stocks are falling, the VIX is rising and the Fed may not move off of ultralow rate targets.

"I don't think the Fed can hike with these global stresses," McDonald said in a Thursday "Trading Nation" segment.

That said, "the VIX could come in significantly by the time they make that decision," Cowen & Co.'s head of equity sales trading, David Seaburg, pointed out. "I think that things are going to calm down ... [and] I think they do make a decision to go in September."


Trades to Watch

Trader Bios


Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

Read more