As the lagged impact of the Federal Reserve’s rate hikes feels its way into the economy, a pickup in volatility will likely remain a feature of the future...
As the delayed impact of the Federal Reserve’s rate-hike policy filters its way through the U.S. economy, a pickup in volatility can be expected.
“The key takeaway from our work over the past few years analyzing the impact of macro factors on equity volatility is that it is the real central bank policy rate that drives the volatility in equities,” said Kumar, in a research note on Friday.Read: Here’s one sign in bonds that the U.S. is poised for a sharp economic slowdown in 2019
In the chart below, changes in the inflation-adjusted fed-funds rate foreshadowed changes in the S&P 500’s SPX, +0.96% realized volatility 2½ years later. In other words, investors have to wait for around 30 months before the real fed-funds rate’s rise starts to lead to turbulence in equities, said Kumar.
After plumbing as low as negative 3% in 2016, the real fed-funds rate now stands slightly below 1%, back into positive territory. Other analysts and senior Fed officials have made similar arguments that Wall Street may still contend with resistance, in the wake of the central bank’s push to push rates higher. Capital Economics said the U.S. economy could still face a further slowdown from the spate of rate increases over the past four years.
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