Volatility Risk Post-Fed Meeting

As we approach this week’s FOMC meeting, the market has been grinding higher in anticipation of a 25-basis-point rate cut, which would move the target range to 3.50%–3.75%. Small-cap stocks have seen positive inflows over the last two weeks, with regional banks, a key component of the Russell 2000, catching a bid as a “bull steepener” trade emerges within the Treasury complex. Short-term yields have moved lower, while traders continue rotating out of longer-duration bonds such as the 10-Year and 30-Year Treasuries resulting in the spread to move higher.

Despite this constructive backdrop, the VIX remains at relatively low levels given the meaningful event risk on the calendar. Traders should be mindful that volatility may re-rate higher, as much of the optimism surrounding this meeting may already be priced in. Rate-cut expectations have swung sharply over the past month, and it may be difficult for the Fed to deliver a sufficiently dovish tone to complement a rate cut, especially as federal economic data remains stale due to the shutdown, and seasonal distortions continue to affect high-frequency releases like last week’s Initial Claims report.

While the market is positioning for a Santa Claus rally from a seasonality standpoint, volatility, measured by the VIX, traditionally rises over the next week. Today’s move higher in the VIX appears largely mechanical rather than a reflection of traders actively bidding for volatility, as the index is now fully priced off January SPX options, which carry higher premiums for the out-of-the-money strikes feeding into the VIX calculation. 

If volatility does pick up, we may see rotation flow back into mega-cap tech, which tends to be viewed as a stable equity allocation due to strong cash positions and robust free-cash-flow profiles. One stock to watch closely this week is Nvidia (NVDA), which has been consolidating technically, with the daily MACD setting up for a potential bullish crossover.

Overall, we may see some consolidation to start the week as markets position ahead of Wednesday’s FOMC decision. During this period, hedging activity in the options complex may begin to accelerate, potentially influencing volatility metrics. After the meeting, market attention will shift to the probability of another rate cut in January, which may become the primary driver of yields in the latter part of the week.

This material is intended for informational purposes only and should not be considered a personalized recommendation or investment advice. Investors should review investment strategies for their own particular situations before making any decisions.

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