On the eve of the Federal Reserve's decision, the U.S. market is "super calm"
Data shows that the Fear Index VIX and the MOVE Index, which tracks expected volatility in the bond market, have both fallen to low levels, with a large number of tail risk hedges being unwound. However, analysts warn that this calm is relatively fragile: there are policy disagreements within the Federal Reserve, which could lead to split votes; hawkish rate cuts or worsening employment could quickly trigger a new round of volatility
Panic sentiment on Wall Street has resurfaced, and the market is experiencing a rare moment of tranquility.
The VIX panic index hovers near its yearly low, while the MOVE index has just hit its lowest level since early 2021, with a large number of tail risk hedging positions being liquidated. This ultra-low volatility environment is once again dominating the trading rhythm for 2025 at a critical moment ahead of the Federal Reserve's upcoming policy meeting.
Just a few weeks ago, the market was filled with panic. AI stocks surged and then fell, and volatility in the stock and credit markets soared at one point. But the panic came quickly and faded just as fast, as investors returned to a low-volatility, high-confidence betting mode on risk assets.
According to an article from Wall Street Journal, the inflation data released on Friday met expectations, and traders are pricing in rate cuts for next week, anticipating more cuts in 2026, despite signs of divergence among Federal Reserve officials regarding future policy direction.
Mandy Xu, head of Cboe Derivatives Market Intelligence, believes the current calm state is relatively fragile. She stated:
"A divided Federal Reserve, or even hawkish rate cuts, could become catalysts for more volatility before the end of the year. The largest volatility spike since April occurred right after the last Federal Reserve meeting, when Powell's remarks were more hawkish than expected, which is no coincidence."
Risk Indicators Decline Across the Board
The comprehensive decline in market panic indicators clearly reflects the current "super calm" state.
Wall Street's panic indicator, the VIX index, hovers near its yearly low, while the MOVE index, which tracks expected volatility in the bond market, has just reached its lowest level since early 2021.
Just a few weeks ago, the market was shrouded in panic, with AI stocks first soaring and then reversing, and volatility in the stock and credit markets exploding at one point. But the panic dissipated almost as quickly as it arrived.
Tail risk hedging has been unwound. Indicators measuring the demand for tail risk insurance have fallen to their lowest levels of the year after a sharp spike. Tail risk hedging tools like the Cambria Tail Risk ETF still maintain a slight positive return in 2025, but despite market turmoil in November and April, these tools failed to hold on to significant gains.
Meanwhile, a broad asset class risk indicator designed by Bank of America has fallen into negative territory, currently hovering around levels seen before the Federal Reserve began raising interest rates.
Investors are betting on the continuation of this calm state. U.S. equity funds have recorded inflows for 12 consecutive weeks. However, not all signs of caution have disappeared—according to research by Bank of America citing EPFR data, investors have poured the third-largest weekly funds into money market funds this year.
Economists expect a split vote at next week's Federal Reserve meeting, with St. Louis Fed President Alberto Musalem likely to vote against alongside Kansas City Fed's Jeff Schmid. Federal Reserve Governor Stephen Miran is expected to argue that a 25 basis point rate cut is too small, highlighting the increasing divergence within the central bank regarding future policy paths
Economic Data Steadily Supports Market Confidence
One important reason for the current calm in the market is that economic data has not surprised investors. The monthly increase in the Federal Reserve's preferred inflation measure released on Friday was 0.2%, with the annualized increase remaining slightly below 3%, indicating that inflation pressures remain stable but still sticky.
Despite signs of weakness in the labor market—according to ADP Research, the scale of layoffs by U.S. companies in November was the largest since the beginning of 2023—the market's confidence in economic resilience continues to support the current low volatility environment.
According to an article from Wall Street Insight, based on data from ADP Research, the number of layoffs by U.S. companies in November reached the highest level since early 2023, with layoff news continuing to emerge. Priya Misra, a portfolio manager at JP Morgan Asset Management, stated that low volatility reflects confidence in "policy support" and a still-resilient economy, but she warned that this situation could quickly unravel.
"What could change this is a significant increase in layoffs—employment data may reflect a greater risk of recession, which has not yet been priced in. Another risk for bulls is 'a hawkish and divided Federal Reserve concerned about inflation.'"
