High VIX, no hike? What market history tells us

Volatility to keep rate hike away?

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."