VIX in a Tightening Environment

The VIX is obviously very low. But, as I've written, it can stay long for a very long time. Generally, a specific catalyst is required for it to rise. It never hurts to guess what such a catalyst might be.

A reader recently suggested to me that the current Fed tightening phase might be such a catalyst. It is hard to know if this is true. Looking at the last case is probably the only hint we have. Below I show the Fed funds rate and the VIX from 2004 to the end of 2006, which was the last time the Fed was raising rates.




Again, not much can be concluded from one instance, but the relationship was obviously negative. The VIX dropped as rates were raised. The Fed was very careful to telegraph their intent and not spook markets. I can't see why this time would be different.
Euan SinclairComment