Following Kevin Warsh's speech at the Jackson Hole symposium, the likelihood of an interest rate hike by the Federal Reserve in September surged from 35% to nearly 60%, according to CME Group's Fed funds futures.
This increase in expectations has not unsettled stock traders; in fact, the Cboe Volatility Index (VIX) fell to 14.1, its lowest point of the year, suggesting a level of confidence in the market. Although the S&P 500 experienced a slight decline of three-tenths of a percent, it remained relatively stable compared to declines in bitcoin and gold, which both dropped over 2.5%.
Analysts like Ben Emons from Highline Asset Management noted that a vigilant Fed on inflation without aggressive rate hikes is viewed positively for the economy, supporting the bullish sentiment for stocks. However, Mandy Xu from Cboe pointed out that the effects of higher interest rates may take time to manifest, as indicated by the steepening of the S&P 500's term structure.
The current spread between six-month and one-month options is in the 96th percentile of the past year, reflecting increased uncertainty regarding inflation and interest rates. Despite the potential for future volatility, James Perry of Perry International Capital Partners remarked that the Fed remains in an easing mode, suggesting that falling oil prices could further reduce inflation expectations