Despite the Fed’s credit-tightening without warning, the volatility in financial markets in 1994 was subdued, compared with recent experience. Measured by taking the 20-day moving average of the daily percentage change in yields, regardless of positive or negative, the average volatility in 10-year Treasuries in 1994 was 0.12%. The average volatility for the S&P 500 Index was negative 0.01% and the VIX Index for 1994 averaged 13.9.
To be sure, many current events today have caused uncertainty in markets, but the Fed has been in there hot and heavy with its forward guidance. Recall that early this year the central bank believed that inflation caused by frictions in reopening the economy after the pandemic and supply-chain disruptions was temporary. Only belatedly did it reverse gears, raise rates and signal that further substantial hikes are coming. Faulty Fed forecasts resulted in faulty forward guidance and increased financial market volatility.
Consequently, volatility in markets is much greater than in 1994, before the central bank broadcast its plans. Using my same measure of volatility, this year to date it has averaged 0.46% for the 10-year Treasury note. The S&P 500’s volatility is also a larger number, negative 0.09%, and the VIX has averaged 25.8.
So, financial markets without forward guidance may be calmer. As Fed Chair, Powell carries tremendous weight at the central bank and I think his suggestion to terminate forward guidance will prevail.
Gary Shilling is president of A. Gary Shilling & Co., a consultancy. He is author, most recently, of The Age of Deleveraging: Investment Strategies for a Decade of Slow Growth and Deflation, and he may have a stake in the areas he writes about.