Chart of the week

Could quantitative tightening drive volatility higher?

As the Fed begins to tighten monetary policy, our chart looks at the VIX through various Fed policies over the past 15 years.

April 1, 2022 | 2 minute read

Quantitative easing has historically suppressed market volatility

Source: Bloomberg Finance, L.P., FS Investments. Line shows VIX Index while colors indicate Fed policy. Time period displayed from January 2, 2008—March 23, 2022.

  • As the chart shows, quantitative easing (QE) has consistently helped dampen market volatility over time as the Fed’s purchase of securities on the open market drove down interest rates and lifted asset valuations.1
  • QE began as an emergency measure but has evolved into a consistent actor in monetary policy over the last 15 years.
  • As the Fed’s current tightening cycle has officially lifted off, and inflation sits at multi-decade highs and is still on the rise, investors are preparing for the Fed to begin quantitative tightening (QT), whereby it will reduce assets on its balance sheet purchased through QE.
  • QT is an area with which investors have significantly less experience. In fact, the sole time the Fed previously embarked on QT, extreme market volatility in Q4 2018 eventually changed their course.1
  • To be clear, the U.S. economy remains on solid footing and can likely withstand a normalization in rates.
  • However, between a flattening yield curve, ongoing geopolitical tensions and sustained high oil prices and inflation, investors may be wise to diversify into asset classes that are not reliant on traditional markets to generate returns.

  • Bloomberg Finance, L.P., FS Investments. Line shows VIX Index while colors indicate Fed policy. Time period displayed from January 2, 2008—March 23, 2022.

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