A television station broadcasts the Federal Reserve’s interest rate cut on the trading floor of the New York Stock Exchange (NYSE) in New York, U.S., on Wednesday, December 18, 2024.
Michael Nagel | Bloomberg | Getty Images
Wall Street’s fear gauge – the VIX – spiked by the second-largest percentage in its history on Wednesday after the Federal Reserve shocked the stock market by saying it would scale back its interest-rate cutting campaign.
The CBOE Volatility Index rose 74% to close at 27.62, up from around 15 earlier in the day. That increase is the second largest in history, following a 115% jump to above 37 in February 2018, when there was a boom in funds tracking the volatility index.
Wednesday’s move comes after the central bank said it is likely to cut rates only twice next year, down from the four cuts it predicted in September. This alarmed investors who wanted low interest rates to continue fueling the bull market. The Dow Jones Industrial Average fell 1,100 points, marking its tenth consecutive loss.
Normally, a value greater than 20 in the VIX indicates a higher level of fear in the market. However, for most of this year the VIX had remained below that level, worrying investors who felt the market had become too complacent.
The VIX is calculated based on the prices of put and call options on the S&P 500. A spike could indicate a rush by investors to buy put options to protect against a downturn.
CBOE Volatility Index, 5 Days
However, there has been another significant increase in the VIX in 2024. The third-largest rise in the VIX in history occurred on August 5, 2024, when fears of a US recession and a big drop in the yen hit trading. caused the VIX to rise by about 65%, closing above 38. On an intraday basis, the VIX briefly reached the 65 mark that day.
On Thursday, the VIX last hovered just above 20, down more than 25% from the day before.