🔥 Premium AI-powered Stock Picks from InvestingPro Now up to 50% OffCLAIM SALE

The Fed Just Disengaged Its Volatility Suppression Machine

Published 04/07/2022, 12:42 AM
Updated 07/09/2023, 06:31 AM

The Fed minutes, released yesterday, reveal the central bank intends to start reducing its balance sheet by as much as $95 billion per month beginning in May. Investors ought to pay very close attention to this development because, for a very long time now, the Fed has effectively used its asset purchase program to suppress volatility across a variety of markets including the equity market.

When the Fed has removed this volatility dampening system in the past, it regularly led to a series of rolling ructions in the broad stock market. The most recent of these was the 2018-2020 period which began with the Volmageddon episode and ended with the COVID crash upon which the Fed reengaged its volatility suppression program in a massive way.

Fed Balance Sheet 6-Month ROC & VIX, 6-Month Average Chart

Considering the fact that the magnitude of these ructions has grown with every subsequent removal and/or reversal of the asset purchase program, it only stands to reason that the greatest volatility explosion could still lie ahead of us.

As Christopher Cole has put it:

“Risk cannot be destroyed, it can only be shifted through time and redistributed in form.”

It’s possible that Fed policy over the past decade, rather than destroy risk, has only managed to shift risks into the future. Now that rapidly rising inflation makes the continuation of the program untenable, those risks could finally materialize in a way we haven’t seen as of yet. At the very least, it could mean that volatility in the stock market could be elevated for the foreseeable future.

Latest comments

Loading next article…
Risk Disclosure: Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.
© 2007-2024 - Fusion Media Limited. All Rights Reserved.