Investors eye Fed’s next move as Wall Street’s fear gauge jumps 50%

Global stock markets suffered a significant blow on Monday amid rising fears of a U.S. recession, prompting debates among investors and analysts about whether the Federal Reserve will need to accelerate its policy easing to support growth.

The latest market turmoil propelled the , also known as just the VIX index, by around 50% to 35.16, the highest since October 2020. 

Often referred to as the “fear gauge,” VIX measures the market’s expectations of near-term volatility as conveyed by options. It reflects investor sentiment and anxiety, with higher values indicating increased market uncertainty and potential turmoil. The index is widely used as a barometer of market risk and investor sentiment.

The sharp uptick in the fear gauge comes amid a broad equities sell-off triggered by a 12.4% crash in Japan’s to 7-month lows, marking a level of loss unseen since the 2011 global financial crisis.

Alongside it, futures fell 3.3%, while dipped 2%. At the same time, EUROSTOXX 50 futures dropped 2%, and slid 2.4%.

The alarmingly weak July payrolls report led markets to price in a 78% likelihood that the Federal Reserve will not only cut rates in September but also ease by a full 50 basis points. Futures suggest 122 basis points of cuts in the 5.25-5.5% funds rate this year, with rates projected to be around 3.0% by the end of 2025.

“We have increased our 12-month recession odds by 10pp to 25%,” Goldman Sachs analysts wrote in a note, though they believed the risk was mitigated by the Fed’s substantial capacity to ease policy.

Goldman now anticipates quarter-point cuts in September, November, and December.

“The premise of our forecast is that job growth will recover in August and the FOMC will judge 25bp cuts a sufficient response to any downside risks,” they added. “If we are wrong and the August employment report is as weak as the July report, then a 50bp cut would be likely in September.”

Meanwhile, JPMorgan economists were even more pessimistic, setting the odds of a U.S. recession at 50%.

“Now that the Fed looks to be materially behind the curve, we expect a 50bp cut at the September meeting, followed by another 50bp cut in November,” JPMorgan noted.

“Indeed, a case could be made for an inter-meeting easing, especially if the data soften further—although Fed officials might worry about how such a move could be (mis)interpreted.”