Fed Rate Cut

The Federal Reserve’s latest rate cut offered a fascinating real-time study in volatility. Even when policy moves are widely anticipated, the manner of the market’s reaction can reveal subtle but important signals.

We highlight two key observations below.

1. Unusual Pre-Announcement Behaviour

→ Ordinarily, the Normalised Expected Move (dotted line, Chart 1) decays as the event approaches, reflecting reduced uncertainty.

→ Yesterday, we saw the opposite — an “inverted decay” where implied volatility rose, signalling heightened concern rather than calm.

Chart 1 — SPX Normalised Expected Move vs Historical Average EM

2. Sharp Post-Announcement Volatility Reset

→ The SPX Expected Move (solid line, Chart 1) fell from ~50 to 38.55.
→ That marks a 23% decline from its peak, a rapid compression of forward uncertainty.
→ The S&P 500 (Chart 2) swung from -0.60% intraday to close at -0.10%, showing directional turbulence alongside a sharp re-pricing of optionality.

Chart 2 — SPX Intraday Price Chart

The interplay between monetary policy and market microstructure is rarely straightforward. Yesterday's atypical build-up in volatility, followed by a swift collapse, highlights the importance of these dynamics for risk management and option pricing frameworks.